Risk aversion, risk sharing, and joint bidding: a study of outer continental shelf petroleum auctions

Steven W. Millsaps and Mack Ott

No 1985-014, Working Papers from Federal Reserve Bank of St. Louis

Abstract: The bidding decision by firms in OCS petroleum auctions is modeled as an application of the Arrow-Pratt theory of risk aversion. This theory is apt since OCS leases are innately risky investments: during 1954-1969, 77 percent of the Gulf of Mexico leases were unprofitable, while the average bonus (price) was $2,228,000. The model of the simultaneous choices of bid level, share in joint bids, and bids on other tracts in the same auction is tested on 17 auctions during 1968-1975. Empirical results support the hypothesis of decreasing absolute risk aversion and the risk-pooling explanation of joint bidding.

Date: 1985
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Published in Land Economics, November 1985, 61(4), pp. 372-86

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