← Search

Review of Economic Studies Vol. 89 No. 5 2022

Optimal Auctions: Non-expected Utility and Constant Risk Aversion

Alex Gershkov1; Benny Moldovanu2; Philipp Strack3; Mengxi Zhang2

1 Department of Economics and the Federmann Center for the Study of Rationality, The Hebrew University of Jerusalem, and School of Economics , University of Surrey · 2 Department of Economics, University of Bonn · 3 Department of Economics, Yale University.

Abstract

We study auction design for bidders equipped with non-expected utility preferences that exhibit constant risk aversion (CRA). The CRA class is large and includes loss-averse, disappointment-averse, mean-dispersion, and Yaari’s dual preferences as well as coherent and convex risk measures. Any preference in this class displays first-order risk aversion, contrasting the standard expected utility case which displays second-order risk aversion. The optimal mechanism offers “ full-insurance” in the sense that each agent’s utility is independent of other agents’ reports. The seller excludes less types than under risk neutrality and awards the object randomly to intermediate types. Subjecting intermediate types to a risky allocation while compensating them when losing allows the seller to collect larger payments from higher types. Relatively high types are willing to pay more, and their allocation is efficient.

DOI
10.1093/restud/rdab096
Volume
89
Issue
5
Pages
2630-2662
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite