Determining Risk Aversion in Share Auctions

65 Pages Posted: 14 Jun 2019 Last revised: 10 Jul 2019

Date Written: July 9, 2019

Abstract

This paper analyzes risk aversion in a discriminatory share auction in which bidders' demand schedules must be decreasing step functions with a bounded number of steps. For the case of constant absolute risk aversion, I show that the bidders' marginal valuations are set identified for any given risk-aversion coefficient. Further, I derive necessary conditions for best-response behavior, which together with the bounds on the marginal valuations allow to fit bidders' risk preferences to the data. I provide proofs of concept using data from tariff-rate quota auctions in Switzerland. The error in the estimates of the firms' indirect profit functions when ignoring risk aversion is substantial.

Keywords: Discriminatory share auctions, estimation, risk aversion, best-response violations

JEL Classification: D44, C57

Suggested Citation

Häfner, Samuel, Determining Risk Aversion in Share Auctions (July 9, 2019). Available at SSRN: https://ssrn.com/abstract=3397027 or http://dx.doi.org/10.2139/ssrn.3397027

Samuel Häfner (Contact Author)

University of St. Gallen ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

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