A pure variation of risk in first-price auctions

Oliver Kirchkamp, J. Philipp Reiß and Abdolkarim Sadrieh

Abstract:

We introduce a new method of varying the risk that bidders face in first-price private value auctions. We find that decreasing bidders' risk significantly reduces the degree of overbidding relative to the risk-neutral Bayesian-Nash equilibrium prediction. This implies that risk affects bidding behavior as generally expected in auction theory. While resolving a long-standing debate on the effect of risk on auction behavior, our results give rise to a new puzzle. As risk is diminished and overbidding decreases for most of the value range, a significant degree of underbidding sets in for very low values.

JEL-Classification: C92, D44

Keywords: risk, first-price auctions, risk-aversion, overbidding.

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• You can download an early version of the paper as METEOR research memorandum 2006/58.
• A later version is available as Jena Economic Research Paper 2008-024.
• Here is the most recent version as of April 2010.