An experimental study of precautionary bidding

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

Research output: Contribution to journalArticleScientificpeer-review

6 Citations (Scopus)

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

Keywords

  • precautionary bidding
  • prudence
  • auction
  • experiment

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