On Risk Aversion in Auctions

2026-03-10

AI Summary

This study investigates how risk aversion influences bidding behavior and equilibrium outcomes in first-price and second-price auctions. By developing a unified analytical framework grounded in bidding preferences and integrating game theory, expected utility theory, and comparative statics, the paper uncovers the underlying mechanism through which risk aversion generates opposing bidding effects across auction formats: it induces bidders to submit higher bids in first-price auctions while leading to lower bids in second-price auctions. This work not only reconciles seemingly contradictory findings in the existing literature but also establishes rigorous comparative static results regarding equilibrium behavior. The analysis provides a novel theoretical foundation for understanding the interplay between bidders’ risk preferences and auction design.

Technology Category

• Game Theory and Economic Paradigms: Auctions and Market-Based Systems
• Multiagent Systems: Mechanism Design
• Reasoning under Uncertainty: Decision/Utility Theory

Application Category

• Economics, Online Markets and Human Computation: Uses of LLMs and GenAI for marketplace design, bidding, and strategic interactions
• Security and Privacy: Large-scale security measurements
• Graph Algorithms and Modeling for the Web: Efficient manipulation of static and dynamic Web-related graphs

Abstract

We provide a unifying way to analyze how risk aversion changes bidding in auctions by asking which bids become more attractive as bidders become more risk averse. In first-price auctions, under two payoff conditions--winning is never worse than the outside option, and winning with a low bid is preferable to winning only with a high bid--greater risk aversion makes high bids more appealing. In second-price auctions with a known outside option, bidding more increases risk exposure conditional on winning, so greater risk aversion favors lower bids. We show these bid-level forces translate into corresponding equilibrium comparative statics.

Problem

• risk aversion
• auctions
• bidding behavior
• first-price auctions
• second-price auctions

Innovation

• risk aversion
• auctions
• bidding behavior
• first-price auction
• second-price auction