Inference of Bidders’ Risk Attitudes in Ascending Auctions with Endogenous Entry, Second Version

Hanming Fang and Xun Tang ()
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Xun Tang: Department of Economics, University of Pennsylvania

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: Bidders’ risk attitudes have important implications for sellers seeking to maximize expected revenues. In ascending auctions, auction theory predicts bid distributions in Bayesian Nash equilibrium does not convey any information about bidders' risk preference. We propose a new approach for inference of bidders’ risk attitudes when they make endogenous participation decisions. Our approach is based on the idea that bidders' risk premium - the difference between ex ante expected profits from entry and the certainty equivalent - required for entry into the auction is strictly positive if and only if bidders are risk averse. We show bidders' expected profits from entry into auctions is nonparametrically recoverable, if a researcher observes the distribution of transaction prices, bidders' entry decisions and some noisy measures of entry costs. We propose a nonparametric test which attains the correct level asymptotically under the null of risk-neutrality, and is consistent under fixed alternatives. We provide Monte Carlo evidence of the finite sample performance of the test. We also establish identification of risk attitudes in more general auction models, where in the entry stage bidders receive signals that are correlated with private values to be drawn in the bidding stage.

Keywords: Ascending auctions; Risk attitudes; Endogenous entry; Nonparametric Test; Bootstrap (search for similar items in EconPapers)
JEL-codes: C12 C14 D44 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2011-05-28, Revised 2012-04-17
New Economics Papers: this item is included in nep-cta, nep-ecm, nep-ppm and nep-upt
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