- Premium auctions and risk preferences
- Journal of Economic Theory
- Volume | Issue number
- 146 | 6
- Pages (from-to)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
Amsterdam Business School Research Institute (ABS-RI)
In a premium auction, the seller offers some "payback", called premium, to a set of high bidders at the end of the auction. This paper investigates how the performance of such premium tactics is related to the biddersʼ risk preferences. We analyze a two-stage English premium auction model with symmetric interdependent values, in which the bidders may be risk averse or risk preferring. Upon establishing the existence and uniqueness of a symmetric equilibrium, we show that the premium causes the expected revenue to increase in the biddersʼ risk tolerance. A "net-premium effect" is key to this result.
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