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Economic Theory

, Volume 27, Issue 3, pp 597–613 | Cite as

The role of varying risk attitudes in an auction with a buyout option

  • Timothy MathewsEmail author
  • Brett Katzman
Research Articles

Summary.

An auction with a buyout option is modelled. Such an option allows a bidder to purchase the item being auctioned at a pre-specified buyout price, instead of attempting to obtain the item through the traditional auction procedure. This analysis is motivated by internet auctions where such options are present. If all auction participants are risk neutral, the seller will choose a buyout price high enough so that the option is never exercised. However, a risk averse seller facing risk neutral bidders will choose a price low enough so that the option is exercised with positive probability. Further, if bidders are risk neutral and the seller is risk averse, this option may result in a Pareto improvement compared to a sealed bid second price auction.

Keywords and Phrases:

Auctions Internet Buyout option. 

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Copyright information

© Springer-Verlag Berlin/Heidelberg 2006

Authors and Affiliations

  1. 1.Department of EconomicsCalifornia State University-NorthridgeNorthridgeUSA
  2. 2.Department of Economics and FinanceKennesaw State UniversityKennesawUSA

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