This paper concerns the efficient sale of an indivisible risky asset and the effects of changing risk in a setting where buyers exhibit heterogeneous risk preferences. The model allows asymmetric and interdependent values and types. Under certain conditions, efficient implementation in ex post equilibrium is possible through either a direct mechanism or an English auction. This implies that the asset is allocated to the one who derives the highest expected utility surplus from the asset. As the asset’s risk increases, the active buyers are uniformly better off regardless of their risk attitudes (risk averse, risk neutral, or risk preferring). A fundamental reason for this “increasing risk effect” is the fact that the winner’s utility surplus is a convex function of the utility of the pivotal bidder.
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- Audrey Hu (University of Amsterdam)