Making a bid to understand the economic theory of auctions

Dr Sorawoot Srisuma, Reader in Economics at the University of Surrey, and Dr Fábio Sanches, Assistant Professor in Economics at PUC-Rio have been awarded the Newton Advanced Fellowship award for their cross-cultural research to further advance econometric studies of theoretical auction models. Auction theory in economics mathematically formalises various auction formats used in practice. It focuses on deriving optimal behaviours of buyers and sellers, given their preferences, and the implied auction outcomes. An econometric analysis of these theoretical models will enable researchers to use observed data to learn about the underlying preferences of auction participants. Subsequently predictions on future, possibly different, formats of auctions can be made based on economic theory.

The funded project is entitled "Semiparametric estimation of ascending auctions with risk averse sellers" and aims to develop a statistical theory and method that can be used to learn about seller reserve price setting behaviour and buyer bidding behaviour from data on auction bids. The prestigious funding is worth £50,400 and the project is due to start in September 2018.

The research team initially observed that auction items tend to have very low reserve prices and auction models that researchers typically use in practice do not explain this observation very well. An assumption the existing literature makes is that sellers are risk neutral. A recent economic theory has shown that risk averse sellers can be more suitable in many situations and predict that sellers set more conservative reserve prices. The aim of Dr Sanches and Dr Srisuma’s project is to build a statistical model which will be able to detect if sellers are risk averse or risk neutral from the data at hand. Also, any subsequent predictions and policy recommendations made with the model will assume a correct risk appetite for the seller.

The Newton Advanced Fellowship scheme provides established international researchers with an opportunity to develop the research strengths and capabilities of their research group through training, collaboration and reciprocal visits with a partner in the UK. For this project, the funding will allow Dr Sanches to attend training courses, conferences and workshops in the UK and Europe. Some graduate students at PUC-Rio will also be hired as research assistants to gather data and do some computer programming for the project. Dr Sanches will look after the computational and empirical aspects of the work, particularly using his local knowledge to analyse the Brazilian data and Dr Srisuma will travel to Brazil to give seminars and will focus on the methodology and theoretical elements of the study.

Auctions are widely used in many different environments. Examples of items sale include art objects and antiques, commodities such as tobacco and fish, bonds and other financial securities. The beneficiaries from this research could range from top UK auction houses such as Sotheby's or Christie’s to central banks that sell government bonds, where using the right economic model could help them set optimal reserve prices when putting an item on sale.