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Assessing Social Costs of Inefficient Procurement Design

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  • Eklöf, Matias

    ()
    (Department of Economics)

Abstract

This paper considers the social costs implied by inefficient allocation of contracts in a first price, sealed bid procurement auction with asymmetric bidders. We adopt a constrained (piecewise linear) strategy equilibrium concept and estimate the structural parameters of the bidders’ distribution of costs. We estimate social costs defined as the predicted cost difference between the winning firm and the most efficient bidding firm. We also compare the expected procurement costs under two different auction formats. The data is collected from procurement auctions of road painting in Sweden during 1993-99. The results indicate that the social costs of inefficient contract allocation is about 1.7 per cent of total potential social cost and that an efficient second price auction would lower the expected procurement cost by 2.8 per cent.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2003:12.

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Length: 31 pages
Date of creation: 26 Feb 2003
Date of revision:
Publication status: Forthcoming in Journal of the European Economic Association.
Handle: RePEc:hhs:uunewp:2003_012

Contact details of provider:
Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Related research

Keywords: Procurement auctions; inefficiency; constrained strategy equilibrium; simulation;

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References

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  1. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Maskin, Eric & Riley, John, 2000. "Equilibrium in Sealed High Bid Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 439-54, July.
  3. Maskin, Eric & Riley, John, 2000. "Asymmetric Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 413-38, July.
  4. Olivier Armantier & Jean-Pierre Florens & Jean-Francois Richard, 1999. "Nash Equilibrium Approximations in Games of Incomplete Information," Department of Economics Working Papers 99-01, Stony Brook University, Department of Economics.
  5. Armantier, Olivier & Richard, Jean-Francois, 2000. "Empirical Game Theoretic Models: Computational Issues," Computational Economics, Society for Computational Economics, vol. 15(1-2), pages 3-24, April.
  6. Pesendorfer, Martin, 2000. "A Study of Collusion in First-Price Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 381-411, July.
  7. Armantier, O. & Florens, J.-P. & Richard, J.-F., 1998. "Empirical Game Theoretic Models: Constrained Equilibrium & Simulation," Papers 98.498, Toulouse - GREMAQ.
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Cited by:
  1. Thomas Aronsson & S�Ren Blomquist, 2008. "Redistribution and Provision of Public Goods in an Economic Federation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(1), pages 125-143, 02.
  2. Blomquist, Sören & Christiansen, Vidar, 2004. "Taxation and Heterogeneous Preferences," Working Paper Series 2004:9, Uppsala University, Department of Economics.

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