Optimal Auctions for Dual Risk Averse Bidders: Myerson meets Yaari
41 Pages Posted: 27 Mar 2020 Last revised: 3 Aug 2020
Date Written: January 23, 2020
We derive the revenue maximizing mechanism for a risk-neutral seller who
faces Yaari's  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
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