Optimal Auctions for Dual Risk Averse Bidders: Myerson meets Yaari

41 Pages Posted: 27 Mar 2020 Last revised: 3 Aug 2020

See all articles by Alex Gershkov

Alex Gershkov

Hebrew University of Jerusalem

Benny Moldovanu

University of Bonn - Chair of Economic Theory II; Centre for Economic Policy Research (CEPR)

Philipp Strack

Yale, Department of Economics

Mengxi Zhang

Institute for Microeconomics, University of Bonn

Date Written: January 23, 2020

Abstract

We derive the revenue maximizing mechanism for a risk-neutral seller who
faces Yaari's [1987] dual risk-averse bidders. The optimal mechanism offers "full-
insurance" in the sense that each agent's utility is independent of other agents'
reports. The seller excludes less types than under risk neutrality, and awards the
object randomly to intermediate types. Subjecting intermediate types to a risky
allocation while compensating them when losing allows the seller to collect larger
payments from higher types. Relatively high types are anyway willing to pay more,
and their allocation is efficient. Finally, a first-price auction maximizes revenue
within the class of standard auctions.

Keywords: Auction Design, Yaari Preferences, Rank Dependent Utility, Non-Linear Probability Weighting

Suggested Citation

Gershkov, Alex and Moldovanu, Benny and Strack, Philipp and Zhang, Mengxi, Optimal Auctions for Dual Risk Averse Bidders: Myerson meets Yaari (January 23, 2020). Available at SSRN: https://ssrn.com/abstract=3547437 or http://dx.doi.org/10.2139/ssrn.3547437

Alex Gershkov

Hebrew University of Jerusalem ( email )

Mount Scopus
Jerusalem, IL Jerusalem 91905
Israel

HOME PAGE: http://pluto.huji.ac.il/~alexg/

Benny Moldovanu

University of Bonn - Chair of Economic Theory II ( email )

Lennestrasse 37
53113 Bonn
Germany
+49 228 736395 (Phone)
+49 228 737940 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Philipp Strack

Yale, Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Mengxi Zhang (Contact Author)

Institute for Microeconomics, University of Bonn ( email )

Bonn, 53113
Germany

HOME PAGE: http://https://sites.google.com/bu.edu/mengxizhang

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