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Risk aversion and asymmetry in procurement auctions: Identification, estimation and application to construction procurements

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  • Campo, Sandra
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    Abstract

    This article studies a model of asymmetric risk averse bidding within the independent private value paradigm. The inherent asymmetry in cost and risk aversion imposes an original restriction on the observed bid data, an exact equality which leads to the model semiparametric identification and estimation. The unobserved arguments of this equality need to be simulated in order to estimate the bidders’ Constant Relative Risk Aversion or Constant Absolute Risk Aversion parameters and their heterogeneous cost distributions. In the Los Angeles City Hall construction contracts offered between 1994 and 2003, the model and methodology help reveal that financial asymmetries affect the firms’ cost distribution, while experience influences their degree of risk aversion.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304407611001746
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Econometrics.

    Volume (Year): 168 (2012)
    Issue (Month): 1 ()
    Pages: 96-107

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    Handle: RePEc:eee:econom:v:168:y:2012:i:1:p:96-107

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    Web page: http://www.elsevier.com/locate/jeconom

    Related research

    Keywords: First-price auctions; Independent private values; Asymmetric risk aversion; Semiparametric identification and estimation;

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    References

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    15. Gourieroux, C & Monfort, A & Renault, E, 1993. "Indirect Inference," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages S85-118, Suppl. De.
    16. Zheng, Charles Z., 2001. "High Bids and Broke Winners," Journal of Economic Theory, Elsevier, vol. 100(1), pages 129-171, September.
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