Incentive effects of funding contracts: an experiment
In: Research paper series 78
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In: Research paper series 78
In: Working paper series 2005,29
In: Group decision and negotiation, Band 23, Heft 4, S. 921-936
ISSN: 1572-9907
In: The economic journal: the journal of the Royal Economic Society, Band 121, Heft 557, S. 1361-1397
ISSN: 1468-0297
In: Working paper series 2006, 26
We introduce a new method of varying the risk that bidders face in first-price private value auctions. We find that decreasing bidders' risk significantly reduces the degree of overbidding relative to the risk-neutral Bayesian-Nash equilibrium prediction. This implies that risk affects bidding behavior as generally expected in auction theory. While resolving a long-standing debate on the effect of risk on auction behavior, our results give rise to a new puzzle. As risk is diminished and overbidding decreases for most of the value range, a significant degree of underbidding sets in for very low values.