On Risk Aversion in Auctions

TL;DR

This paper analyzes how risk aversion influences bidding strategies in auctions, revealing that increased risk aversion leads to higher bids in first-price auctions and lower bids in second-price auctions under certain conditions.

Contribution

It provides a unified framework to understand the impact of risk aversion on bidding behavior across different auction formats.

Findings

Greater risk aversion increases bids in first-price auctions under specific payoff conditions.

In second-price auctions, higher risk aversion leads to lower bids when outside options are known.

Theoretical equilibrium comparisons confirm the bid-level effects of risk aversion.

Abstract

We provide a unifying way to analyze how risk aversion changes bidding in auctions by asking which bids become more attractive as bidders become more risk averse. In first-price auctions, under two payoff conditions--winning is never worse than the outside option, and winning with a low bid is preferable to winning only with a high bid--greater risk aversion makes high bids more appealing. In second-price auctions with a known outside option, bidding more increases risk exposure conditional on winning, so greater risk aversion favors lower bids. We show these bid-level forces translate into corresponding equilibrium comparative statics.