Charity Auctions as Assets: All-Pay vs. Winner-Pay Mechanisms in Mean-Variance Space
14 Pages Posted: 10 Jan 2020
Date Written: November 7, 2019
Auctions that generate public good benefits for bidders through revenue, such as those run by a charity, do not adhere to the revenue equivalence theorem. Instead, theory predicts that all-pay auctions will generate greater expected revenues than winner-pay mechanisms. However, this paper demonstrates these greater expected revenues are always accompanied by greater (and in some cases infinite) revenue variance. While a risk-neutral seller would be indifferent to this revenue variance, we show through a mean-variance portfolio approach that plausible levels of risk aversion would compel them to generally avoid all-pay auctions and instead use a combination of winner-pay designs.
Keywords: Auctions, Charitable Giving, Mean-variance relation, Risk-return tradeoff
JEL Classification: D44, D64, G11, G17
Suggested Citation: Suggested Citation