An experimental test of precautionary bidding

Martin Kocher, Julius Pahlke and Stefan Trautmann
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Julius Pahlke: Department of Economics, University of Munich

No 10-08, Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) from School of Economics, University of East Anglia, Norwich, UK.

Abstract: Auctions often involve goods exhibiting a common knowledge ex-post risk that is independent of buyers' private values or their signals regarding common value components. Eso and White (2004) showed theoretically that ex-post risk leads to precautionary bidding for DARA bidders: Agents reduce their bids by more than their appropriate risk premium. Testing precautionary bidding with data from the field seems almost impossible. We conduct experimental first-price auctions that allow us to directly identify the precautionary premium and find clear evidence for precautionary bidding. Bidders are significantly better off when a risky object rather than an equally valued sure object is auctioned. Our results are robust if we control for potentially confounding decision biases.

Keywords: precautionary bidding; prudence; auction; experiment (search for similar items in EconPapers)
JEL-codes: C91 D44 D81 (search for similar items in EconPapers)
Date: 2010-07-01
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: An Experimental Test of Precautionary Bidding (2010)
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