cient Auctions of Risky Asset to Heterogeneous Risk Averse ( Preferring ) Buyers 1 Audrey

1 We are grateful to Steve Matthews for suggesting the approach taken in this study, and to Eric Maskin for his encouraging comment. Abstract This paper concerns the e¢ cient sale of an indivisible risky asset and the e¤ects of changing risk in a setting where buyers exhibit heterogeneous risk preferences. The model allows asymmetric and interdependent values and types. Under certain conditions, e¢ cient implementation in ex post equilibrium is possible through either a direct mechanism or an English auction. This implies that the asset is allocated to the one who derives the highest expected utility surplus from the asset. As the asset's risk increases, the active buyers are uniformly better o¤ regardless of their risk attitudes (risk averse, risk neutral, or risk preferring). A fundamental reason for this " increasing risk e¤ect " is the fact that the winner's utility surplus is a convex function of the utility of the pivotal bidder.