Working Paper: NBER ID: w19435
Authors: Hanming Fang; Xun Tang
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: bidders risk attitudes; ascending auctions; endogenous entry; nonparametric tests
JEL Codes: C12; C14; D44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Risk Aversion (D81) | Risk Premium Required for Entry (G19) |
| Risk Premium Required for Entry (G19) | Expected Profits from Entry Exceed Certainty Equivalent (D81) |
| Entry Costs Known (D41) | Expected Entry Cost Can Be Consistently Estimated (C51) |
| Auction Characteristics and Potential Competition (D44) | Inference of Risk Attitudes (D81) |
| Higher Levels of Risk Aversion (D81) | Lower Entry Probabilities (C29) |
| Higher Levels of Risk Aversion (D81) | Lower Transaction Prices (G19) |