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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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.:
- Ewerhart II, Christian & Fieseler, Karsten, 2002.
"Procurement Auctions and Unit-Price Contracts,"
Sonderforschungsbereich 504 Publications
02-11, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
- Levin, Jonathan & Athey, Susan, 2001.
"Information and Competition in U.S. Forest Service Timber Auctions,"
3612768, Harvard University Department of Economics.
- 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.
- 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.
- Susan Athey & Jonathan Levin, 1999. "Information and Competition in U.S. Forest Service Timber Auctions," Working papers 99-12, Massachusetts Institute of Technology (MIT), Department of Economics.
- 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.
- 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.
- David Arditi & Ranon Chotibhongs, 2009. "Detection and prevention of unbalanced bids," Construction Management and Economics, Taylor & Francis Journals, vol. 27(8), pages 721-732.
- Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mats Berggren).
If references are entirely missing, you can add them using this form.