Premium Auctions and Risk Preferences

39 Pages Posted: 2 Aug 2010

See all articles by Audrey Hu

Audrey Hu

Tilburg Law and Economics Center (TILEC)

Theo Offerman

University of Amsterdam - Faculty of Economics & Econometrics (FEE)

Liang Zou

University of Amsterdam - Faculty of Economics and Business (FEB)

Date Written: July 14, 2010

Abstract

In a premium auction, the seller offers some "pay back", called premium, to the highest bidders. This paper investigates how the performance of such premium tactic is related to the participant's risk preferences. By developing an English premium auction model with symmetric interdependent values, where both the seller and the buyers may be risk averse (or preferring), we show that a) the premium reduces the riskiness of revenue regardless of the bidders' risk preferences, and b) the premium causes the expected revenue to increase in the bidders' risk tolerance. A "net-premium effect" and a "second-order stochastic dominance effect" are keys to these results.

Keywords: premium auction, English auction, risk preferences, premium effects

JEL Classification: D44

Suggested Citation

Hu, Audrey and Offerman, Theo and Zou, Liang, Premium Auctions and Risk Preferences (July 14, 2010). TILEC Discussion Paper No. 2010-028. Available at SSRN: https://ssrn.com/abstract=1651162 or http://dx.doi.org/10.2139/ssrn.1651162

Audrey Hu (Contact Author)

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Theo Offerman

University of Amsterdam - Faculty of Economics & Econometrics (FEE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4294 (Phone)
+31 20 525 5283 (Fax)

Liang Zou

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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