SELECTION INTO AUCTIONS FOR RISKY AND AMBIGUOUS PROSPECTS

Authors

  • MARTIN G. KOCHER,

    1. Kocher: Professor of Economics, School of Economics, University of East Anglia, Norwich, NR4 7TJ, UK. Phone +441603593338, E-mail m.kocher@uea.ac.uk
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  • STEFAN T. TRAUTMANN

    1. Trautmann: Assistant Professor of Economics, Department of Social Psychology, Tilburg Institute for Behavioral Economics Research, Tilburg University, Tilburg, The Netherlands; and CentER, Tilburg University, Tilburg, The Netherlands. Phone +31134664115, Fax +31134663042, E-mail s.t.trautmann@uvt.nl
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    • We thank an anonymous referee, Yan Chen as the responsible editor, Theo Offerman, Jan Potters, Peter P. Wakker, Richard Zeckhauser, and seminar participants at the Decision and Uncertainty Workshop 2007, the ESA World Meeting 2007, FUR 2008, IMEBE 2008, GTS 2008, Colorado State University, the Dutch Central Bank, the University of Innsbruck, the University of Ulm, and the ENABLE symposium 2008 in Amsterdam for helpful suggestions. We gratefully acknowledge financial support from the ENABLE Project under the European Union 6th Framework Program. The paper reflects the views of the authors, and the European Union is not liable for any use that may be made of the information contained herein.


Abstract

We study experimentally the selection into first-price sealed-bid auctions for a risky or an ambiguous prospect. Most subjects chose to submit a bid for the risky prospect, leading to thinner markets for the ambiguous prospect. Transaction prices for both prospects were equal although subjects expected the ambiguous markets to be smaller. Evidence of a positive correlation between risk and ambiguity aversion suggests that the ambiguous markets were populated by relatively risk tolerant bidders. A control experiment with selection in a simple choice task shows that subjects correctly anticipate the effects of selection on market size and risk attitudes. (JEL C91, D44, D81)

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