Journal
ECONOMICS LETTERS
Volume 221, Issue -, Pages -Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.econlet.2022.110891
Keywords
Bias; Experiment; First -price auctions; Probability weighting; Risk aversion
Categories
Funding
- Social Sciences and Humanities Research Council of Canada, Insight Development Grant
- [#430-2020-0035]
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This study examines the power probability weighting function and risk-averse preferences in first price sealed-bid auctions. By observing and analyzing the influence of the auction environment, the data supports both theories, but also reveals a significant number of violations.
In first price sealed-bid auctions, a power probability weighting function is observationally equivalent to a model with constant relative risk aversion. By comparing auctions with different ceilings on a computerized opponent's bid space, we can separate inverse S-shaped probability weighting as commonly used in the literature and risk-averse preferences from the distribution of observed bids. We find evidence to support both theories in the data. However, we also observe a significant number of violations after accounting for decision noise, which suggest that bidders' valuations may be malleable to cues of the auction environment. (c) 2022 Elsevier B.V. All rights reserved.
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