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Investment Incentives in Procurement Auctions

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Author Info
Leandro Arozamena
Estelle Cantillon

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Abstract

This paper investigates firms' incentives to invest in cost reduction in the first price sealed bid auction, a format largely used for procurement. Two central features of the model are that we allow firms to be heterogeneous and that investment is observable. We find that firms will tend to underinvest in cost reduction because they anticipate fiercer head-on competition. Using the second price auction as a benchmark, we also find that the first price auction will elicit less investment from market participants and that this is socially inefficient. These results have implications for market design when investment is important. Copyright The Review of Economic Studies Limited, 2004.

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Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 71 (2004)
Issue (Month): 1 (01)
Pages: 1-18
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Handle: RePEc:bla:restud:v:71:y:2004:i:1:p:1-18

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  2. Nicola Persico, 1997. "Information Acquisition in Auctions," UCLA Economics Working Papers 762, UCLA Department of Economics. [Downloadable!]
    Other versions:
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  8. Robert H. Porter & J. Douglas Zona, 1999. "Ohio School Milk Markets: An Analysis of Bidding," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 263-288, Summer. [Downloadable!] (restricted)
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  9. Milgrom, Paul & Roberts, John, 1994. "Comparing Equilibria," American Economic Review, American Economic Association, vol. 84(3), pages 441-59, June. [Downloadable!] (restricted)
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  12. Maskin, Eric & Riley, John, 2000. "Equilibrium in Sealed High Bid Auctions," Review of Economic Studies, Blackwell Publishing, vol. 67(3), pages 439-54, July.
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  17. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January. [Downloadable!] (restricted)
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  18. Athey, Susan, 2001. "Single Crossing Properties and the Existence of Pure Strategy Equilibria in Games of Incomplete Information," Econometrica, Econometric Society, vol. 69(4), pages 861-89, July.
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  20. Estelle Cantillon, 2000. "The Effect of Bidders' Asymmetries on Expected Revenue in Auctions," Cowles Foundation Discussion Papers 1279, Cowles Foundation, Yale University. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ichiro Obara, 2006. "The Full Surplus Extraction Theorem with Hidden Actions," Levine's Bibliography 122247000000001206, UCLA Department of Economics. [Downloadable!]
    Other versions:
  2. Urs Meister, 2004. "Franchise Bidding in the Water Industry – Auction Schemes and Investment Incentives," Public Economics 0412011, EconWPA. [Downloadable!]
    Other versions:
  3. Nicolás Figueroa & Gonzalo Cisternas, 2007. "Sequential Procurement Auctions and Their Effect on Investment Decisions," Documentos de Trabajo 230, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
  4. Veronika Grimm & Friederike Mengel & Giovanni Ponti & Lari Arthur Viianto, 2006. "Investment Incentives in Auctions: An Experiment," Working Paper Series in Economics 26, University of Cologne, Department of Economics. [Downloadable!]
  5. Leonardo Rezende, 2009. "Biased procurement auctions," Economic Theory, Springer, vol. 38(1), pages 169-185, January. [Downloadable!] (restricted)
  6. Harrison Cheng, 2005. "Ranking Sealed High-Bid and Open Asymmetric Auctions," IEPR Working Papers 05.26, Institute of Economic Policy Research (IEPR). [Downloadable!]
  7. Johannes Münster, 2006. "Contests with Investment," Discussion Papers 120, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  8. Susan Athey & Jonathan Levin & Enrique Seira, 2004. "Comparing Open and Sealed Bid Auctions: Theory and Evidence from Timber Auctions," Levine's Bibliography 122247000000000524, UCLA Department of Economics. [Downloadable!]
    Other versions:
  9. Bernard Lebrun, 2006. "Auctions with Almost Homogeneous Bidders," Working Papers 2006_7, York University, Department of Economics. [Downloadable!]
  10. Daniel Kraehmer & Roland Strausz, 2006. "VCG mechanisms and efficient ex ante investments with externalities," Papers 031, Departmental Working Papers. [Downloadable!]
    Other versions:
  11. Nicolas Melissas, 2008. "Bidding and Drilling on Offshore Wildcat Tracts," Working Papers 0805, Centro de Investigacion Economica, ITAM. [Downloadable!]
  12. Susan Athey, 2005. "Comparing Open and Sealed Bid Auctions: Theory and Evidence from Timber Auctions," Theory workshop papers 658612000000000098, UCLA Department of Economics. [Downloadable!]
  13. Johannes Münster, 2007. "Contests with investment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(8), pages 849-862. [Downloadable!]
  14. Hanming Fang & Stephen Morris, 2003. "Multidimensional Private Value Auctions," Cowles Foundation Discussion Papers 1423, Cowles Foundation, Yale University. [Downloadable!]
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