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


Klose, Bettina; Schweinzer, Paul (2017). 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 unique 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 uniformly distributed valuations, we show that a variance-averse player always bids higher than her risk-neutral opponent with the same valuation. Utilising our analytically derived bidding functions we discuss all-pay auctions with variance-averse bidders from an auction designer’s perspective. We briefly consider possible extensions of our model, including noisy signals, type-dependent attitudes towards risk, and variance-seeking preferences.

Abstract

We analyse the all-pay auction with incomplete information and variance-averse bidders. We characterise the unique 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 uniformly distributed valuations, we show that a variance-averse player always bids higher than her risk-neutral opponent with the same valuation. Utilising our analytically derived bidding functions we discuss all-pay auctions with variance-averse bidders from an auction designer’s perspective. We briefly consider possible extensions of our model, including noisy signals, type-dependent attitudes towards risk, and variance-seeking preferences.

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3 citations in Microsoft Academic

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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, L1
Uncontrolled Keywords:All-pay auctions, contests, incomplete information, private values, risk-aversion, mean-variance preferences
Language:English
Date:December 2017
Deposited On:21 Nov 2012 16:33
Last Modified:19 Mar 2018 07:45
Series Name:Working paper series / Department of Economics
Number of Pages:40
ISSN:1664-7041
Additional Information:Revised version
OA Status:Green
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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