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Why are bids not more unbalanced?

Author

Listed:
  • 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.

Suggested Citation

  • Mandell, Svante & Nyström, Johan, 2011. "Why are bids not more unbalanced?," Working papers in Transport Economics 2011:13, CTS - Centre for Transport Studies Stockholm (KTH and VTI).
    • Handle: RePEc:hhs:ctswps:2011_013
    as

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    File URL: http://www.transportportal.se/SWoPEc/CTS2011-13.pdf
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    References listed on IDEAS

    as
    1. Ewerhart, Christian & Fieseler, Karsten, 2003. "Procurement Auctions and Unit-Price Contracts," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 569-581, Autumn.
    2. Susan Athey & Jonathan Levin, 2001. "Information and Competition in U.S. Forest Service Timber Auctions," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 375-417, April.
    3. David Arditi & Ranon Chotibhongs, 2009. "Detection and prevention of unbalanced bids," Construction Management and Economics, Taylor & Francis Journals, vol. 27(8), pages 721-732.
    4. 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.
    5. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
    6. Mandell, Svante & Nilsson, Jan-Eric, 2010. "A Comparison of Unit Price and Fixed Price Contracts for Infrastructure Construction Projects," Working Papers 2010:13, Swedish National Road & Transport Research Institute (VTI).
    7. 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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Unbalanced bidding; risk; modelling; unit price contraction; public procurement;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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