How Risk Sharing May Enhance Efficiency in English Auctions

Tinbergen Institute Discussion Paper 14-015/I

47 Pages Posted: 28 Jan 2014

See all articles by Audrey Hu

Audrey Hu

University of Amsterdam - Faculty of Economics and Business (FEB)

T. J. S. Offerman

University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute

Liang Zou

University of Amsterdam - Faculty of Economics and Business (FEB)

Date Written: January 22, 2014

Abstract

We investigate the possibility of enhancing efficiency by awarding premiums to a set of highest bidders in an English auction - in a setting that extends Maskin and Riley (1984, Econometrica 52: 1473-1518) in three aspects: (i) the seller can be risk averse, (ii) the bidders can have heterogeneous risk preferences, and (iii) the auction can have a binding reserve price. Our analysis reveals that the premium has an intricate joint effect on risk sharing and expected revenue, which in general benefits risk averse bidders. When the seller is more risk averse than the pivotal bidder - a condition often verifiable by deduction prior to the auction - the premium also benefits the seller and therefore leads to a Pareto improvement of the English auction. We discuss how this finding is related to the seller’s degree of risk aversion, the reserve price, the riskiness of the object for sale, the degree of heterogeneity in risk preferences among the bidders, and the number of the potential bidders.

Keywords: Risk sharing, Pareto efficiency, Premium auction, English auction, Reserve price, Ensuing risk, Heterogeneous risk preferences

JEL Classification: D44

Suggested Citation

Hu, Audrey and Offerman, T. J. S. and Zou, Liang, How Risk Sharing May Enhance Efficiency in English Auctions (January 22, 2014). Tinbergen Institute Discussion Paper 14-015/I, Available at SSRN: https://ssrn.com/abstract=2385831 or http://dx.doi.org/10.2139/ssrn.2385831

Audrey Hu (Contact Author)

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

T. J. S. Offerman

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Liang Zou

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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