Identification and Estimation of Risk Aversion in First Price Auctions with Unobserved Auction Heterogeneity

FEDS Working Paper No. 2015-089

http://dx.doi.org/10.17016/FEDS.2015.089

60 Pages Posted: 11 Oct 2015

See all articles by Serafin Grundl

Serafin Grundl

Board of Governors of the Federal Reserve System

Yu Zhu

Government of Canada - Bank of Canada

Date Written: September 29, 2015

Abstract

We extent the point-identification result in Guerre, Perrigne, and Vuong (2009) to environments with one-dimensional unobserved auction heterogeneity. We also show a robustness result for the case where the exclusion restriction used for point identification is violated: We provide conditions to ensure that the primitives recovered under the violated exclusion restriction still bound the true primitives in this case. We propose a new Sieve Maximum Likelihood Estimator, show its consistency and illustrate its finite sample performance in a Monte Carlo experiment. We investigate the bias in risk aversion estimates if unobserved auction heterogeneity is ignored and explain why the sign of the bias depends on the correlation between the number of bidders and the unobserved auction heterogeneity. In an application to USFS timber auctions we find that the bidders are risk neutral, but we would reject risk neutrality without accounting for unobserved auction heterogeneity.

Keywords: Estimation, First Price Auction, Identification, Risk Aversion, Unobserved Heterogeneity

JEL Classification: C57

Suggested Citation

Grundl, Serafin and Zhu, Yu, Identification and Estimation of Risk Aversion in First Price Auctions with Unobserved Auction Heterogeneity (September 29, 2015). FEDS Working Paper No. 2015-089. Available at SSRN: https://ssrn.com/abstract=2671933 or http://dx.doi.org/10.2139/ssrn.2671933

Serafin Grundl (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Yu Zhu

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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