Spite vs. Risk: Explaining overbidding

Oliver Kirchkamp and Wladislaw Mill

In this paper we use an experiment to compare a theory of risk aversion and a theory of spite. As a workhorse we use the second-price all-pay auction and the first-price auction. Both risk and spite can be used to rationalise deviations from risk neutral equilibrium bids in auctions. We exploit that equilibrium predictions in the second-price all-pay auctions for spiteful preferences are different than those for risk averse preferences. Indeed, we find that spite is a more convincing explanation for bidding behavior in particular for the second-price all-pay auction. Not only can spite rationalise observed bids, also our measure for spite is consistent with observed bids.

JEL: C91; C72; D44; D91.

Keywords: Auction, Overbidding, Spite, Risk, Experiment