TY - JOUR

T1 - Heterogeneous risk/loss aversion in complete information all-pay auctions

AU - Chen, Zhuoqiong (Charlie)

AU - Ong, David

AU - Segev, Ella

N1 - Publisher Copyright:
© 2017 Elsevier B.V.

PY - 2017/6/1

Y1 - 2017/6/1

N2 - 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.

AB - 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.

KW - All-pay auction

KW - Loss aversion

KW - Risk aversion

UR - http://www.scopus.com/inward/record.url?scp=85016817521&partnerID=8YFLogxK

U2 - 10.1016/j.euroecorev.2017.03.002

DO - 10.1016/j.euroecorev.2017.03.002

M3 - Article

AN - SCOPUS:85016817521

SN - 0014-2921

VL - 95

SP - 23

EP - 37

JO - European Economic Review

JF - European Economic Review

ER -