An experimental study of precautionary bidding

M.G. Kocher, J. Pahlke, S.T. Trautmann

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Auctions often involve goods exhibiting a common-knowledge ex-post risk. In
such auctions, precautionary bidding predicts that under expected utility, DARA bidders reduce their bids by more than the appropriate risk premium. Because the degree of riskiness of an auctioned good and bidders’ levels of risk aversion are difficult to observe in field settings, we conduct experimental auctions that allow us to identify the precautionary premium directly. We find strong evidence for precautionary bidding. The effect is robust to changes in experimental design features. Our experiment provides the first empirical demonstration of precautionary motives in a strategic setting.
Original languageEnglish
Pages (from-to)27-38
Number of pages12
JournalEuropean Economic Review
Volume78
DOIs
Publication statusPublished - Aug 2015

Fingerprint

Auctions
Experimental study
Bidding
Expected utility
Experimental auctions
Bid
Experimental design
Experiment
Riskiness
Common knowledge
Risk premium
Risk aversion
Precautionary motive
Premium

Keywords

  • precautionary bidding
  • prudence
  • auction
  • experiment

Cite this

Kocher, M.G. ; Pahlke, J. ; Trautmann, S.T. / An experimental study of precautionary bidding. In: European Economic Review. 2015 ; Vol. 78. pp. 27-38.
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An experimental study of precautionary bidding. / Kocher, M.G.; Pahlke, J.; Trautmann, S.T.

In: European Economic Review, Vol. 78, 08.2015, p. 27-38.

Research output: Contribution to journalArticleScientificpeer-review

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