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

Hanming Fang and Xun Tang

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

Abstract: Bidders’ risk attitudes have key implications for choices of revenue-maximizing auction formats. In ascending auctions, bid distributions do not provide information about risk preference. We infer risk attitudes using distributions of transaction prices and participation decisions in ascending auctions with entry costs. Nonparametric tests are proposed for two distinct scenarios: first, the expected entry cost can be consistently estimated from data; second, the data does not report entry costs but contains exogenous variations of potential competition and auction characteristics. In the first scenario, we exploit the fact that the risk premium required for entry - the difference between ex ante expected profits from entry and the certainty equivalent .is strictly positive if and only if bidders are risk averse. Our test is based on identification of bidders’ ex ante profits. In the second scenario, our test builds on the fact that risk attitudes affect how equilibrium entry probabilities vary with observed auction characteristics and potential competition. We also show identification of risk attitudes in a more general model of ascending auctions with selective entry, where bidders receive entry-stage signals that are correlated with private values.

Keywords: Ascending auctions; Risk attitudes; Endogenous entry; Tests (search for similar items in EconPapers)
JEL-codes: C12 C14 D44 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2013-09-09
New Economics Papers: this item is included in nep-com and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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