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Bidding for Incompete Contracts

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Author Info

  • Patrick Bajari

    (Duke University and NBER)

  • Stephanie Houghton

    (Duke University)

  • Steven Tadelis

    (Stanford University)

Abstract

When procurement contracts are incomplete, they are frequently changed after the contract is awarded to the lowest bidder. This results in a final cost that differs from the initial price, and may involve significant transaction costs due to renegotiation. We propose a stylized model of bidding for incomplete contracts and apply it to data from highway repair contracts. We estimate the magnitude of transaction costs and their impact using both reduced form and fully structural models. Our results suggest that transactions costs are a significant and important determinant of observed bids, and that bidders strategically respond to contractual incompleteness. Our findings point at disadvantages of the traditional bidding process that are a consequence of transaction costs from contract adaptations.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2004.141.

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Date of creation: Dec 2004
Date of revision:
Handle: RePEc:fem:femwpa:2004.141

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Related research

Keywords: Procurement; Construction;

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References

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  1. Steven Tadelis, 2009. "Auctions Versus Negotiations in Procurement: An Empirical Analysis," Journal of Law, Economics and Organization, Oxford University Press, vol. 25(2), pages 372-399, October.
  2. Ariel Pakes, 2003. "Common Sense and Simplicity in Empirical Industrial Organization," Harvard Institute of Economic Research Working Papers 2022, Harvard - Institute of Economic Research.
  3. Estelle Cantillon & Martin Pesendorfer, . "Combination Bidding in Multi-unit Auctions," ULB Institutional Repository 2013/151705, ULB -- Universite Libre de Bruxelles.
  4. Sandra Campo & Emmanuel Guerre & Isabelle Perrigne & Quang Vuong, 2003. "Semiparametric Estimation of First-price Auctions with Risk Averse Bidders," Working Papers 2003-09, Centre de Recherche en Economie et Statistique.
  5. Emmanuel Guerre & Isabelle Perrigne & Quang Vuong, 2000. "Optimal Nonparametric Estimation of First-Price Auctions," Econometrica, Econometric Society, vol. 68(3), pages 525-574, May.
  6. Kenneth Hendricks & Joris Pinkse & Robert H. Porter, 2001. "Empirical Implications of Equilibrium Bidding in First-Price, Symmetric, Common Value Auctions," NBER Working Papers 8294, National Bureau of Economic Research, Inc.
  7. Han Hong, 2000. "Increasing Competition and the Winner's Curse: Evidence from Procurement," Econometric Society World Congress 2000 Contributed Papers 1628, Econometric Society.
  8. Mireia Jofre-Bonet & Martin Pesendorfer, 2003. "Estimation of a Dynamic Auction Game," Econometrica, Econometric Society, vol. 71(5), pages 1443-1489, 09.
  9. Susan Athey & Jonathan Levin, 1999. "Information and Competition in U.S. Forest Service Timber Auctions," NBER Working Papers 7185, National Bureau of Economic Research, Inc.
  10. Patrick Bajari & Steven Tadelis, 1999. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," Working Papers 99029, Stanford University, Department of Economics.
  11. Elyakime, Bernard & Laffont, Jean-Jacques & Loisel, Patrice & Vuong, Quang, 1993. "First-Price Sealed-Bid Auctions with Secret Reservation Prices," IDEI Working Papers 27, Institut d'Économie Industrielle (IDEI), Toulouse.
  12. Patrick Bajari & Lixin Ye, 2003. "Deciding Between Competition and Collusion," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 971-989, November.
  13. Patrick Bajari & Ali Hortacsu, 2003. "Are Structural Estimates of Auction Models Reasonable? Evidence from Experimental Data," NBER Working Papers 9889, National Bureau of Economic Research, Inc.
  14. Robert H. Porter & J. Douglas Zona, 1992. "Detection of Bid Rigging in Procurement Auctions," NBER Working Papers 4013, National Bureau of Economic Research, Inc.
  15. Paul R. Milgrom., 1987. "Employment Contracts, Influence Activities and Efficient Organization Design," Economics Working Papers 8741, University of California at Berkeley.
  16. Masten, Scott E, 1984. "The Organization of Production: Evidence from the Aerospace Industry," Journal of Law and Economics, University of Chicago Press, vol. 27(2), pages 403-17, October.
  17. Kenneth S. Corts, 2004. "The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling," Journal of Law, Economics and Organization, Oxford University Press, vol. 20(1), pages 230-260, April.
  18. Han Hong & Matthew Shum, 2002. "Increasing Competition and the Winner's Curse: Evidence from Procurement," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 871-898.
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Citations

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Cited by:
  1. Gregory Lewis & Patrick Bajari, 2011. "Moral Hazard, Incentive Contracts and Risk: Evidence from Procurement," NBER Working Papers 17647, National Bureau of Economic Research, Inc.
  2. repec:hal:wpaper:hal-00512813 is not listed on IDEAS
  3. Susan Athey & Philip A. Haile, 2006. "Empirical Models of Auctions," NBER Working Papers 12126, National Bureau of Economic Research, Inc.
  4. repec:ste:nystbu:06-22 is not listed on IDEAS
  5. Athias, Laure & Saussier, Stéphane, 2007. "Contractual flexibility or rigidity for public private partnerships? Theory and evidence from infrastructure concession contracts," MPRA Paper 10541, University Library of Munich, Germany.

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