Authors: Benjamin Balzer, Antonio Rosato
Date of publication: September 2022
Working paper number: 02
Abstract:
We characterize the optimal reserve price in first-price and second-price auctions with independent private values when bidders are expectations-based loss averse. Under “unac- climating personal equilibrium” (UPE), whereby bidders keep their expectations fixed when choosing their bids, the optimal public reserve price can be lower than under either risk neu- trality or risk aversion. Moreover, secret and random reserve prices raise more revenue than public ones since, by giving every bidder a small chance to win the auction, the seller exposes all bidders to the “attachment effect”. In contrast, under “choice-acclimating personal equi- librium” (CPE), whereby a bid determines both the reference lottery and the outcome lottery, the optimal reserve price is public and it differs across the two auction formats. Furthermore, the seller excludes more types compared to the risk-neutral and risk-averse benchmarks.
Keywords: Reference-Dependent Preferences; Loss Aversion; Reserve Price; First-Price Auction; Second-Price Auction; Personal Equilibrium