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Why are bids not more unbalanced?

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Author Info

  • Mandell, Svante

    ()
    (VTI)

  • Nyström, Johan

    ()
    (VTI)

Abstract

Earlier theoretical models of unbalanced bidding in unit price contracts (UPC) ofter predict corner solutions, i.e. zero bids for unit prices of expected overextimated quantities. However, anecdotal evidence indicates a lack of zero bids in the actual contracts. We pursue a possible explanation for this anomaly in risk-aversion of the contractor. Using a simple model we show that a contractor with superior information may exploit this in the bidding process to increase her expectd revenue. However, in so doing she increases her risk exposure. If the contractor is risk-averse, she typically will avoid a corner solution to this risk vs. expected return trade-off.

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File URL: http://www.transportportal.se/SWoPEc/CTS2011-13.pdf
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Bibliographic Info

Paper provided by CTS - Centre for Transport Studies Stockholm (KTH and VTI) in its series Working papers in Transport Economics with number 2011:13.

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Length: 12 pages
Date of creation: 02 Nov 2011
Date of revision:
Handle: RePEc:hhs:ctswps:2011_013

Contact details of provider:
Postal: Centrum för Transportstudier (CTS), Teknikringen 10, 100 44 Stockholm, Sweden
Web page: http://www.kth.se/abe/om_skolan/organisation/centra/cts

Related research

Keywords: Unbalanced bidding; risk; modelling; unit price contraction; public procurement;

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  1. David William Cattell & Paul Anthony Bowen & Ammar Kaka, 2010. "The risks of unbalanced bidding," Construction Management and Economics, Taylor & Francis Journals, vol. 28(4), pages 333-344.
  2. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
  3. 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.
  4. Ewerhart, Christian & Fieseler, Karsten, 2003. " Procurement Auctions and Unit-Price Contracts," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 569-81, Autumn.
  5. David William Cattell & Paul Anthony Bowen & Ammar Kaka, 2008. "A simplified unbalanced bidding model," Construction Management and Economics, Taylor & Francis Journals, vol. 26(12), pages 1283-1290.
  6. David Arditi & Ranon Chotibhongs, 2009. "Detection and prevention of unbalanced bids," Construction Management and Economics, Taylor & Francis Journals, vol. 27(8), pages 721-732.
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