Heterogeneous risk/loss aversion in complete information all-pay auctions

Chen, Zhuoqiong (Charlie), Ong, David and Segev, Ella (2017) Heterogeneous risk/loss aversion in complete information all-pay auctions. European Economic Review, 95. pp. 23-37. ISSN 0014-2921

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Abstract

We extend previous theoretical work on n-player complete information all-pay auctions to incorporate heterogeneous risk- and loss-averse utility functions. We provide sufficient and necessary conditions for the existence of equilibria with a given set of active players with any strictly increasing utility functions and characterize the players’ equilibrium mixed strategies. Assuming that players can be ordered by their risk aversion (player a is more risk-averse than player b, if whenever player b prefers a certain payment over a given lottery, so does player a), we find that in equilibrium, the more risk-averse players either bid higher than the less risk-averse players and win with higher ex-ante probability – or they drop out. Furthermore, while each player’s expected bid decreases with the other players’ risk aversion, her expected bid increases with her own risk aversion. Thus, increasing a player’s risk aversion creates two opposing effects on total expected bid. A sufficient condition for the total expected bid to decrease with a player’s risk aversion is that this player is relatively more risk-averse compared to the rest of the players. Our findings have important implications for the literature on gender differences in competitiveness and for gender diversity in firms that use personnel contests for promotions.

Item Type:	Article
Official URL:	https://www.journals.elsevier.com/european-economi...
Additional Information:	© 2017 Elsevier B.V.
Divisions:	Management
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	D - Microeconomics > D4 - Market Structure and Pricing > D44 - Auctions D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Economic Models of Political Processes: Rent-Seeking, Elections, Legislatures, and Voting Behavior D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
Date Deposited:	24 Mar 2017 17:23
Last Modified:	14 Sep 2024 07:24
URI:	http://eprints.lse.ac.uk/id/eprint/70793

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