CeDEx workshop - Martin Kocher (University of East Anglia)

An Experimental Test of Precautionary Bidding

Auctions often involve goods exhibiting a common knowledge ex-post risk that leads to precautionary bidding with DARA bidders in expected utility models, i.e., bidders reduce their bids by more than the appropriate risk premium. Since the degree of riskiness of the good and bidders’ risk aversion are unobservable in field settings, we conduct experimental auctions that allow identifying the precautionary premium directly. Our results provide clear support for the precautionary bidding conjecture. Bidders are better off when a risky object rather than an equally valued sure object is auctioned. This result is robust when controlling for potentially confounding decision biases.

The paper is available for download here.

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