Why are bids not more unbalanced?
AbstractEarlier 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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Bibliographic InfoPaper provided by CTS - Centre for Transport Studies Stockholm (KTH and VTI) in its series Working papers in Transport Economics with number 2011:13.
Length: 12 pages
Date of creation: 02 Nov 2011
Date of revision:
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
Unbalanced bidding; risk; modelling; unit price contraction; public procurement;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-07 (All new papers)
- NEP-CTA-2011-11-07 (Contract Theory & Applications)
- NEP-MIC-2011-11-07 (Microeconomics)
- NEP-UPT-2011-11-07 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- 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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