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A pure variation of risk in first-price auctions

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We introduce a new method of varying the risk that bidders face in rst-price private value auctions. We nd that decreasing bidders risk signi cantly reduces the degree of overbidding relative to the risk-neutral Bayesian-Nash equilibrium prediction. This implies that risk a¤ects bidding behavior as generally expected in auction theory. While resolving a long-standing debate on the e¤ect 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 signi cant degree of underbidding sets in for very low values.

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Oliver Kirchkamp, J. Philipp Reiss, Abdolkarim Sadrieh

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Adapt according to the presented license agreement and reference the original author.