An Experimental Test of Precautionary Bidding

Kocher, Martin G.; Pahlke, Julius and Trautmann, Stefan T. (August 2010): An Experimental Test of Precautionary Bidding. Discussion Papers in Economics 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.

• Item Type: Paper
• Keywords: precautionary bidding, prudence, auction, experiment
• Faculties: Economics; Economics > Munich Discussion Papers in Economics; Economics > Munich Discussion Papers in Economics > Game Theory; Economics > Chairs > Chair of Empirical Economics
• Subjects: 300 Social sciences > 300 Social sciences, sociology and anthropology; 300 Social sciences > 330 Economics
• JEL Classification: C91, D44, D81
• Language: English

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