The Role of Risk Preferences in Pay-to-Bid Auctions

We analyze a new auction format in which bidders pay a fee each time they increase the auction price. Bidding fees are the primary source of revenue for the seller, but produce the same expected revenue as standard auctions (assuming risk-neutral bidders). If risk-loving preferences are incorporated in the model, expected revenue increases. Our model predicts a particular distribution of ending prices, which we test against observed auction data. The degree of fit depends on how unobserved parameters are chosen; in particular, a slight preference for risk has the biggest impact in explaining auction behavior, suggesting that pay-to-bid auctions are a mild form of gambling.