Determining Risk Aversion in Share Auctions
65 Pages Posted: 14 Jun 2019 Last revised: 10 Jul 2019
Date Written: July 9, 2019
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: Suggested Citation