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Auctioning risk: The all-pay auction under mean-variance preferences


Klose, Bettina; Schweinzer, Paul (2014). Auctioning risk: The all-pay auction under mean-variance preferences. Working paper series / Department of Economics 97, University of Zurich.

Abstract

We analyse the all-pay auction with incomplete information and variance-averse bidders. We characterise the symmetric equilibrium for general distributions of valuations and any number of bidders. Variance aversion is a sufficient assumption to predict that high-valuation bidders increase their bids relative to the risk-neutral case while low types decrease their bid. Considering an asymmetric two-player environment with uniform valuations, we show that a more variance-averse type always bids higher than her less variance-averse counterpart. Utilising our analytical bidding functions we discuss all-pay auctions with variance-averse bidders from a designer's perspective. We extend our basic model to include noisy signals and allow for the possibility of variance-seeking preferences and type-dependent attitudes towards risk.

Abstract

We analyse the all-pay auction with incomplete information and variance-averse bidders. We characterise the symmetric equilibrium for general distributions of valuations and any number of bidders. Variance aversion is a sufficient assumption to predict that high-valuation bidders increase their bids relative to the risk-neutral case while low types decrease their bid. Considering an asymmetric two-player environment with uniform valuations, we show that a more variance-averse type always bids higher than her less variance-averse counterpart. Utilising our analytical bidding functions we discuss all-pay auctions with variance-averse bidders from a designer's perspective. We extend our basic model to include noisy signals and allow for the possibility of variance-seeking preferences and type-dependent attitudes towards risk.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Business Administration
03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:C7, D7, D81
Uncontrolled Keywords:Auctions, contests, mean-variance preferences
Language:English
Date:June 2014
Deposited On:21 Nov 2012 16:33
Last Modified:13 Aug 2017 12:06
Series Name:Working paper series / Department of Economics
Number of Pages:26
ISSN:1664-7041
Additional Information:Revised version
Official URL:http://www.econ.uzh.ch/static/wp/econwp097.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php

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