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Heterogeneous risk/loss aversion in complete information all-pay auctions

Author

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  • Chen, Zhuoqiong (Charlie)
  • Ong, David
  • Segev, Ella
Abstract
We extend previous theoretical work on n-player complete information all-pay auctions to incorporate heterogeneous risk- and loss-averse utility functions. We provide sufficient and necessary conditions for the existence of equilibria with a given set of active players with any strictly increasing utility functions and characterize the players’ equilibrium mixed strategies. Assuming that players can be ordered by their risk aversion (player a is more risk-averse than player b, if whenever player b prefers a certain payment over a given lottery, so does player a), we find that in equilibrium, the more risk-averse players either bid higher than the less risk-averse players and win with higher ex-ante probability – or they drop out. Furthermore, while each player’s expected bid decreases with the other players’ risk aversion, her expected bid increases with her own risk aversion. Thus, increasing a player’s risk aversion creates two opposing effects on total expected bid. A sufficient condition for the total expected bid to decrease with a player’s risk aversion is that this player is relatively more risk-averse compared to the rest of the players. Our findings have important implications for the literature on gender differences in competitiveness and for gender diversity in firms that use personnel contests for promotions.

Suggested Citation

  • Chen, Zhuoqiong (Charlie) & Ong, David & Segev, Ella, 2017. "Heterogeneous risk/loss aversion in complete information all-pay auctions," European Economic Review, Elsevier, vol. 95(C), pages 23-37.
    • Handle: RePEc:eee:eecrev:v:95:y:2017:i:c:p:23-37
    DOI: 10.1016/j.euroecorev.2017.03.002
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    Cited by:

    1. Dietmar Fehr & Julia Schmid, 2018. "Exclusion in all‐pay auctions: An experimental investigation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 27(2), pages 326-339, June.
    2. Jiaqi Liu & Xi Shen & Wenxi Liu & Zhi Lv & Ruoti Liu & Deng Li, 2023. "Decision Analysis under Behavioral Economics—Incentive Mechanism for Improving Data Quality in Crowdsensing," Mathematics, MDPI, vol. 11(10), pages 1-23, May.
    3. Fu, Qiang & Wang, Xiruo & Wu, Zenan, 2021. "Multi-prize contests with risk-averse players," Games and Economic Behavior, Elsevier, vol. 129(C), pages 513-535.
    4. Fu, Qiang & Wu, Zenan & Zhu, Yuxuan, 2022. "On equilibrium existence in generalized multi-prize nested lottery contests," Journal of Economic Theory, Elsevier, vol. 200(C).
    5. Holst, Gesa Sophie & Musshoff, Oliver & Vollmer, Elisabeth, 2018. "How does the Risk Attitude affect the Bidding Behavior of Farmers? Results of an Experimental Auction," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 67(1), March.
    6. Foster, Joshua, 2020. "Loss aversion and sunk cost sensitivity in all-pay auctions for charity: Theory and experiments," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 84(C).
    7. Fu, Qiang & Lyu, Youji & Wu, Zenan & Zhang, Yuanjie, 2022. "Expectations-based loss aversion in contests," Games and Economic Behavior, Elsevier, vol. 133(C), pages 1-27.
    8. Chen Cohen & Ishay Rabi & Aner Sela, 2022. "Assortative Matching by Lottery Contests," Games, MDPI, vol. 13(5), pages 1-20, September.
    9. (Charlie) Chen, Zhuoqiong & Ong, David & Sheremeta, Roman, 2022. "Competition between and within universities: Theoretical and experimental investigation of group identity and the desire to win," Journal of Economic Psychology, Elsevier, vol. 93(C).
    10. Fu, Qiang & Wang, Xiruo & Zhu, Yuxuan, 2021. "Multi-prize contests with expectation-based loss-averse players," Economics Letters, Elsevier, vol. 205(C).
    11. Brookins, Philip & Jindapon, Paan, 2021. "Risk preference heterogeneity in group contests," Journal of Mathematical Economics, Elsevier, vol. 95(C).

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    More about this item

    Keywords

    All-pay auction; Risk aversion; Loss aversion;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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