An experimental study of precautionary bidding |
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| Institution: | 1. Department of Economics, University of Munich, Germany;2. School of Economics and Finance, Queensland University of Technology, Brisbane, Australia;3. Department of Economics, University of Gothenburg, Sweden;4. Department of Economics, University of Heidelberg, Germany;1. Department of Applied Economics, National University of Kaohsiung, No. 700, Kaohsiung University Road, Nan-Tzu District 811, Kaohsiung, Taiwan, ROC;2. Department of International Business, National Kaohsiung University of Applied Science, Kaohsiung 807, Taiwan, ROC;1. University Bonn, Department of Economics, Institute for Microeconomics, Adenauer Allee 24-42, D-53113 Bonn, Germany;2. Humboldt-Universität zu Berlin, Institute for Economic Theory 1, Spandauer Str. 1, D-10178 Berlin, Germany;1. Previously at: Department of Economics, University of Konstanz, Fach D 150, D-78457 Konstanz, Germany;2. School of Economics, University of New South Wales, Sydney 2052, Australia |
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| 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. |
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| Keywords: | Precautionary bidding Prudence Auction Experiment |
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