Title

The Role of Varying Risk Attitudes in an Auction with a Buyout Option

Department

Economics, Finance, & Quantitative Analysis

Document Type

Article

Publication Date

4-2006

Abstract

An auction with a buyout option is modeled. Such an option allows a bidder to purchase the item being auctioned at a pre-specified buyout price, instead of attempting to obtain the item through the traditional auction procedure. This analysis is motivated by internet auctions where such options are present. If all auction participants are risk neutral, the seller will choose a buyout price high enough so that the option is never exercised. However, a risk averse seller facing risk neutral bidders will choose a price low enough so that the option is exercised with positive probability. Further, if bidders are risk neutral and the seller is risk averse, this option may result in a Pareto improvement compared to a sealed bid second price auction.

Journal

Economic Theory

Journal ISSN

0938-2259

Volume

27

Issue

3

First Page

597

Last Page

613

Digital Object Identifier (DOI)

10.1007/s00199-004-0571-8