Premium auctions and risk preferences: An experimental study

In premium auctions, the highest losing bidder receives a reward from the seller. This paper studies the English premium auction (EPA) for the canonical case of symmetric private values with risk averse and risk loving bidders. We explicitly derive the symmetric equilibrium for bidders with CARA utilities and conduct an experimental study to test the theoretical predictions. In our experiment, subjects are sorted into risk-averse and risk loving groups using the method proposed by Holt and Laury (2002). Each group is invited to separate sessions and we find that revenue in the EPA is significantly higher when bidders are risk loving rather than risk averse. These results are partly consistent with theory and confirm the general view that bidders’ risk preferences constitute an important factor that affects bidding behavior and consequently also the seller’s expected revenue. However, individual subjects rarely follow the equilibrium strategy and as a result, revenue in our experiment is lower than in the symmetric equilibrium. JEL-classification numbers: D44, C92.