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When the highest bidder loses the auction: theory and evidence from public procurement

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  • Francesco Decarolis

    ()
    (University of Chicago and Bank of Italy)

Abstract

In this paper I study two methods often used in public procurement to deal with the risk that the winning bidder may default on his bid: augmenting the standard first price auction with an ex-post verification of the responsiveness of the bids and using an average bid auction. I show that when penalties for defaulting are asymmetric across bidders and when their valuations are characterized by a predominant common component, the average bid auction is preferred over the standard first price by an auctioneer when the costs due to the winner's bankruptcy are high enough. Depending on the cost of the ex-post verification, the average bid auction can be dominated by the first price with monitoring. I use a new dataset of Italian public procurement auctions, run alternately using a form of the average bid auction or the augmented first price, to structurally estimate the bids' verification cost, the firms' mark up and the inefficiency generated by the average bid auctions.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 717.

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Date of creation: Jun 2009
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Handle: RePEc:bdi:wptemi:td_717_09

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Web page: http://www.bancaditalia.it
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Related research

Keywords: auctions; public procurement; collusion; structural estimation;

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Cited by:
  1. Roberto Burguet & Juan-José Ganuza & Esther Hauk, 2009. "Limited Liability and Mechanism Design in Procurement," UFAE and IAE Working Papers 767.09, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  2. Chang, Wei-Shiun & Salmon, Timothy C. & Saral, Krista Jabs, 2013. "Procurement Auctions with Renegotiation and Wealth Constraints," MPRA Paper 50137, University Library of Munich, Germany.
  3. Bentivogli, Chiara & Casadio, Piero & Cullino, Roberto, 2010. "I problemi nella realizzazione delle opere pubbliche: le specificità del Mezzogiorno," MPRA Paper 29385, University Library of Munich, Germany.
  4. Yingyao Hu & David McAdams & Matthew Shum, 2009. "Nonparametric identification of auction models with non-separable unobserved heterogeneity," CeMMAP working papers CWP15/09, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  5. Maris Goldmanis & Antonio Penta & Francesco Decarolis, 2012. "Common Agency and Coordinated Bids in Sponsored Search Auctions," 2012 Meeting Papers 106, Society for Economic Dynamics.
  6. Coviello, Decio & Gagliarducci, Stefano, 2010. "Building Political Collusion: Evidence from Procurement Auctions," IZA Discussion Papers 4939, Institute for the Study of Labor (IZA).
  7. Alessandro Bucciol & Ottorino Chillemi & Giacomo Palazzi, 2011. "Cost Overrun and Auction Format in Public Works," Working Papers 17/2011, University of Verona, Department of Economics.
  8. Bergman, Mats & Lundberg, Sofia, 2011. "Tender Evaluation and Award Methodologies in Public Procurement," UmeÃ¥ Economic Studies 821, Umeå University, Department of Economics.
  9. Elena Krasnokutskaya & Katja Seim, 2011. "Bid Preference Programs and Participation in Highway Procurement Auctions," American Economic Review, American Economic Association, vol. 101(6), pages 2653-86, October.
  10. Ottorino Chillemi & Claudio Mezzetti, 2014. "Optimal procurement mechanisms: bidding on price and damages for breach," Economic Theory, Springer, vol. 55(2), pages 335-355, February.
  11. Luigi Moretti & Paola Valbonesi, 2012. "Subcontracting in Public Procurement: An Empirical Investigation," "Marco Fanno" Working Papers 0154, Dipartimento di Scienze Economiche "Marco Fanno".
  12. Bucciol, Alessandro & Chillemi, Ottorino & Palazzi, Giacomo, 2013. "Cost overrun and auction format in small size public works," European Journal of Political Economy, Elsevier, vol. 30(C), pages 35-42.
  13. Thomas Giebe & Paul Schweinzer, 2013. "Probabilistic Procurement Auctions," CESifo Working Paper Series 4320, CESifo Group Munich.
  14. Thomas Giebe & Paul Schweinzer, 2012. "Fuzzy Price-Quality Ratio Procurement under Incomplete Information," Discussion Papers 12/26, Department of Economics, University of York.
  15. Francesco Decarolis, 2012. "Pricing and Incentives in Publicly Subsidized Health Care Markets: the Case of Medicare Part D," PIER Working Paper Archive 12-026, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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