Hu, A., Offerman, T. and Zou, L. (2011). Premium auctions and risk preferences Journal of Economic Theory, 146(6):2420--2439.

  • Affiliated authors
    Audrey Hu, Theo Offerman
  • Publication year
  • Journal
    Journal of Economic Theory

In a premium auction, the seller offers some 'payback', called premium, to a set of high bidders at the end of the auction. This paper investigates how the performance of such premium tactics is related to the biddersʼ risk preferences. We analyze a two-stage English premium auction model with symmetric interdependent values, in which the bidders may be risk averse or risk preferring. Upon establishing the existence and uniqueness of a symmetric equilibrium, we show that the premium causes the expected revenue to increase in the biddersʼ risk tolerance. A 'net-premium effect' is key to this result.