High-Risk Auctions

In many auctions, the winning bidder faces continuing uncertainty about the value of the purchased item or asset. The government auctions of business licences, procurement contracts, renewable energy projects, oil, gas, or mineral rights, and so on provide typical examples of such ensuing risks. Conceivably, in these situations potential bidders are aware of the risks and, therefore, their own and perceived risk attitudes of the others will affect the way they compete. Despite significant advances in auction theory in the past half-century, little is known about what can be expected from such high-risk auctions except for the limiting case with risk neutral bidders. Risk neutrality is an unsatisfactory assumption for the analysis of high-risk auctions, however, as it assumes away any effect of ensuing risks and hence provides no guidence for revenue maximization or efficient allocation of assets where ensuing risks can matter a lot for the involved participants ? the seller as well as the bidders. This project will provide an in-depth analysis of the strategic decisions of both the auctioneer and bidders in high-risk auctions, incorporating the crutial fact that bidders may have private and heterogeneous attitudes toward risk. In these circumstances, our preliminary investigations suggest that there are ways to enhance Pareto efficiency of the standard auction policies in making both the seller and bidders better off. The project aims at enriching our current understanding about the effects of risk sharing, and the resulting competitive bidding behavior and entry decisions of potentitial bidders, in high-risk auctions. The knowledge derived from this study will be particularly useful for governments to achieve the goal of maximizing revenue or efficiency in the sales of state-owned assets, as these sales frequently involve high risks and high stakes.