Premium Auctions and Risk Preferences
39 Pages Posted: 2 Aug 2010
Date Written: July 14, 2010
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: Suggested Citation
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By Lucy White