Disentangling Risk-Aversion and Loss Aversion in First-Price Auctions: An Empirical Approach

We develop a model which combines general risk-averse preferences with anticipated loss aversion to explain bidding behavior in the first-price auction, where both risk-aversion and loss aversion induce ‘overbidding.’ We then show that the nonparametric utility function and loss aversion coefficient are point-identified by the experiment data with exogenous variation in the number of bidders. Moreover, we develop a structural method with a flexible utility function based on Bernstein polynomials. Our method predicts the data well and the counterfactual analysis shows that loss aversion explains 85 ∼ 90% of overbidding in the data.