Premium Auctions and Risk Preferences

A. Hu, T.J.S. Offerman, L. Zou

Research output: Working paperDiscussion paperOther research output

Abstract

In a premium auction, the seller offers some "pay back", called premium, to the highest bidders. This paper investigates how the performance of such premium tactic is related to the participant's risk preferences. By developing an English premium auction model with symmetric interdependent values, where both the seller and the buyers may be risk averse (or preferring), we show that a) the premium reduces the riskiness of revenue regardless of the bidders' risk preferences, and b) the premium causes the expected revenue to increase in the bidders' risk tolerance. A "net-premium effect" and a "second-order stochastic dominance effect" are keys to these results.
Original languageEnglish
Place of PublicationTilburg
PublisherTILEC
Number of pages39
Volume2010-028
Publication statusPublished - 2010

Publication series

NameTILEC Discussion Paper
Volume2010-028

Keywords

  • premium auction
  • English auction
  • risk preferences
  • premium effects

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