An Experimental Test of Precautionary Bidding

Kocher, Martin G.; Pahlke, Julius und Trautmann, Stefan T. (August 2010): An Experimental Test of Precautionary Bidding. Münchener Wirtschaftswissenschaftliche Beiträge (VWL) 2010-30

Abstract

Auctions often involve goods exhibiting a common knowledge ex-post risk that is independent of buyers’ private values or their signals regarding common value components. Esö and White (2004) showed theoretically that ex-post risk leads to precautionary bidding for DARA bidders: Agents reduce their bids by more than their appropriate risk premium. Testing precautionary bidding with data from the field seems almost impossible. We conduct experimental first-price auctions that allow us to directly identify the precautionary premium and find clear evidence for precautionary bidding. Bidders are significantly better off when a risky object rather than an equally valued sure object is auctioned. Our results are robust if we control for potentially confounding decision biases.

• Dokumententyp: Paper
• Keywords: precautionary bidding, prudence, auction, experiment
• Fakultät: Volkswirtschaft ; Volkswirtschaft > Munich Discussion Papers in Economics ; Volkswirtschaft > Munich Discussion Papers in Economics > Spieltheorie ; Volkswirtschaft > Lehrstühle > Seminar für Experimentelle Wirtschaftsforschung
• Themengebiete: 300 Sozialwissenschaften > 300 Sozialwissenschaft, Soziologie ; 300 Sozialwissenschaften > 330 Wirtschaft
• JEL Classification: C91, D44, D81
• Sprache: Englisch

Literaturliste

Becker, G. M., M. H. de Groot, and J. Marschak (1963). Stochastic Models of Choice Behavior. Behavioral Science 8, 41–55.

Cox, J., V. L. Smith and J. M. Walker (1982). Auction Market Theory of Heterogeneous Bidders. Economic Letters 9, 319–325.

Cox, J., V. L. Smith and J. M. Walker (1985). Experimental Development of Sealed-Bid Auction Theory: Calibrating Controls for Risk. American Economic Review 75, 160–165.

Cox, J., V. L. Smith and J. M. Walker (1988). Theory and Individual Behavior of First-Price Auctions. Journal of Risk and Uncertainty 1, 61–99.

Crawford, V. P. and N. Iriberri (2007). Level-k Auctions: Can a Nonequilibrium Model of Strategic Thinking Explain the Winner’s Curse and Overbidding in Private-Value Auctions? Econometrica 2007, 1721-70.

Deck, C. and H. Schlesinger (2010). Exploring Higher Order Risk Effects. Review of Economic Studies, forthcoming.

Eeckhoudt, L., C. Gollier, and H. Schlesinger (1996). Changes in Background Risk and Risk Taking Behavior. Econometrica 64, 683–689.

Eeckhoudt, L. and H. Schlesinger (2006). Putting Risk in Its Proper Place. American Economic Review 96, 280–289.

Engelbrecht-Wiggans, R. and E. Katok (2007). Regret in Auctions: Theory and Evidence. Economic Theory 33, 81–101.

Esö, P. and L. White (2004). Precautionary Bidding in Auctions. Econometrica 72, 7792.

Fehr, E. and L. Götte (2007). Do Workers Work More if Wages Are High? Evidence from a Randomized Field Experiment. American Economic Review 97, 298–317.

Fehr, E., L. Götte, and M. Lienhard (2008). Loss Aversion and Effort: Evidence from a Field Experiment. Working Paper. University of Zurich.

Fischbacher, U. (2007). Z-Tree: Zurich Toolbox for Ready-Made Economics Experiments. Experimental Economics 10, 171–178.

Gächter, S., E. J. Johnson and A. Herrmann (2007). Individual-Level Loss Aversion in Risky and Riskless Choice. Working Paper. University of Nottingham.

Goeree, J. and T. Offerman (2003). Winner’s Curse without Overbidding. European Economic Review 47, 625–644.

Gollier, C. (2001). The Economics of Risk and Time. MIT Press. Cambridge, MA.

Greiner, B. (2004). An Online Recruitment System for Economic Experiments. In K. Kremer, V. Macho (eds.) Forschung und wissenschaftliches Rechnen 2003. GWDG Bericht 63, Göttingen. Ges. für Wiss. Datenverarbeitung, 79-93.

Halevy, Y. (2007). Ellsberg Revisited: An Experimental Study. Econometrica 75, 503–536.

Isaac, R. M. and D. James (2000). Just What Are You Calling Risk Averse? Journal of Risk and Uncertainty 20, 177–187.

Kagel, J. H., R. M. Harstad, and D. Levin (1987). Information Impact and Allocation Rules in Auctions with Affiliated Private Values: A Laboratory Study. Econometrica 55, 1275–1304.

Karni, E. and Z. Safra (1987). “Preference Reversal” and the Observability of Preferences by Experimental Methods. Econometrica 55, 675–685.

Kihlstrom, R., D. Romer, and S. Williams (1981). Risk Aversion with Random Initial Wealth. Econometrica, 49, 911–920.

Kimball, M. S. (1990). Precautionary Saving in the Small and in the Large. Econometrica 58, 53–73.

Levy, H. (1994). Absolute and Relative Risk Aversion: An Experimental Study. Journal of Risk and Uncertainty 8, 289–307.

Maskin, E. and J. Riley (1984). Optimal Auctions with Risk Averse Buyers. Econometrica 52, 1473-1518.

Milgrom, P. R. and R. J. Weber (1982). A Theory of Auctions and Competitive Bidding. Econometrica 50, 1089–1122.

Plott, C. R. and K. Zeiler (2005). The Willingness to Pay – Willingness to Accept Gap, the “Endowment Effect”, Subject Misconceptions, and Experimental Procedures for Eliciting Valuations. American Economic Review 95, 530–545