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Working Paper 1985-014A

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"Risk Aversion, Risk Sharing, and Joint Bidding: A Study of Outer Continental Shelf Petroleum Auctions"
by Steven W. Millsaps, and Mack Ott

The bidding decision by firms in OCS petroleum auctions is modeled as an application of the Arrow-Pratt theory of risk aversion. This theory is apt since OCS leases are innately risky investments: during 1954-1969, 77percent of the Gulf of Mexico leases were unprofitable, while the average bonus (price) was $2,228,000. The model of the simultaneous choices of bid level, share in joint bids, and bids on other tracts in the same auction is tested on 17 auctions during 1968-1975. Empirical results support the hypothesis of decreasing absolute risk aversion and the risk-pooling explanation of joint bidding.

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