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Multi-round procurement auctions with secret reserve prices: theory and evidence

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  • Lu Ji

    (Department of Economics, Vanderbilt University, Nashville, Tennessee, USA)

  • Tong Li

    (Department of Economics, Vanderbilt University, Nashville, Tennessee, USA)

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    Abstract

    When a secret reserve price is used in an auction, the auctioneer cannot guarantee that the good can be sold out at the auction, and can reauction the unsold objects in the next round. Motivated by this interesting feature observed in the procurement auctions organized by the Indiana Department of Transportation, we construct a dynamic bidding model in multi-round procurement auctions with secret reserve prices and evaluate how the release of the auctioneer's reserve price affects bidders' bidding behavior and the auctioneer's expected payment. Our theoretical model predicts that the equilibrium bids uniformly decline over stages, and the numerical analysis of our model indicates that hiding the reserve price may be better than announcing it for the auctioneer under some specifications of underlying distributions. We develop an empirical model with bidders' discount factor equal to zero to recover the unknown structural parameters and to conduct counterfactual analyses. Copyright © 2008 John Wiley & Sons, Ltd.

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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

    Volume (Year): 23 (2008)
    Issue (Month): 7 ()
    Pages: 897-923

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    Handle: RePEc:jae:japmet:v:23:y:2008:i:7:p:897-923

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    19. Vuong, Q. & Laffont, J.J. & Elyakime, B. & Loisel, P., 1995. "Auctioning and Bargaining: An Econometric Study of Timber Auctions with Secret Reservation Prices," Papers 9502, Southern California - Department of Economics.
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