Inference of Bidders' Risk Attitudes in Ascending Auctions with Endogenous Entry

58 Pages Posted: 14 Sep 2013

See all articles by Hanming Fang

Hanming Fang

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Xun Tang

University of Pennsylvania - Department of Economics; Rice University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 2013

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.

Suggested Citation

Fang, Hanming and Tang, Xun, Inference of Bidders' Risk Attitudes in Ascending Auctions with Endogenous Entry (September 2013). NBER Working Paper No. w19435, Available at SSRN: https://ssrn.com/abstract=2325808

Hanming Fang (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Xun Tang

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-7409 (Phone)
215-573-2057 (Fax)

Rice University - Department of Economics ( email )

6100 South Main Street
Houston, TX 77005
United States

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