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Identification and Estimation in Highway Procurement Auctions under Unobserved Auction Heterogeneity

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Author Info
Elena Krasnokutskaya () (Department of Economics, University of Pennsylvania)
Abstract

This paper proposes a semi-parametric method to uncover the distribution of bidders’ private information in the market for highway procurement when unobserved auction heterogeneity is present. I derive sufficient conditions under which the model is identified and show that the estimation procedure produces uniformly consistent estimators of the distributions in question. The estimation procedure is applied to data from Michigan highway procurement auctions. I estimate that 75% of the variation in bidders’ costs may be attributed to the factors known to all bidders and only 25% may be generated by private information. My results suggest that failing to account for unobserved auction heterogeneity may lead to overestimating uncertainty that bidders face when submitting their bids. As a result both inefficiency of the auction mechanism and mark-ups over the bidders’ costs may be overestimated.

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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 05-006.

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Length: 69 pages
Date of creation: 24 May 2004
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Handle: RePEc:pen:papers:05-006

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Related research
Keywords: First-Price Auctions unobserved auction heterogeneity highway procurement

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Find related papers by JEL classification:
L0 - Industrial Organization - - General
L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
L8 - Industrial Organization - - Industry Studies: Services
M3 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising

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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.:
  1. Emmanuel Guerre & Isabelle Perrigne & Quang Vuong, 2000. "Optimal Nonparametric Estimation of First-Price Auctions," Econometrica, Econometric Society, vol. 68(3), pages 525-574, May.
  2. Laffont, Jean-Jacques & Ossard, Herve & Vuong, Quang, 1995. "Econometrics of First-Price Auctions," Econometrica, Econometric Society, vol. 63(4), pages 953-80, July. [Downloadable!] (restricted)
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  3. ELYAKIME, Bernard & LAFFONT, Jean-Jacques & LOISEL, Patrice & VUONG, Quang, 1993. "First-Price Sealed-Bid Auctions with Secret Reservation Prices," IDEI Working Papers 27, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Porter, Robert H & Zona, J Douglas, 1993. "Detection of Bid Rigging in Procurement Auctions," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 518-38, June. [Downloadable!] (restricted)
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  5. Hendricks, Kenneth & Porter, Robert H, 1988. "An Empirical Study of an Auction with Asymmetric Information," American Economic Review, American Economic Association, vol. 78(5), pages 865-83, December. [Downloadable!] (restricted)
  6. Laffont, Jean-Jacques & Vuong, Quang, 1996. "Structural Analysis of Auction Data," American Economic Review, American Economic Association, vol. 86(2), pages 414-20, May. [Downloadable!] (restricted)
  7. Maskin, Eric & Riley, John, 2000. "Equilibrium in Sealed High Bid Auctions," Review of Economic Studies, Blackwell Publishing, vol. 67(3), pages 439-54, July.
  8. Maskin, Eric & Riley, John, 2000. "Asymmetric Auctions," Review of Economic Studies, Blackwell Publishing, vol. 67(3), pages 413-38, July.
  9. Lebrun, Bernard, 1999. "First Price Auctions in the Asymmetric N Bidder Case," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 125-42, February.
  10. Vuong, Q. & Laffont, J.J. & Elyakime, B. & Loisel, P., 1995. "Auctioning and Bargaining: An Econometric Study of Timber Auctions with Secret Reservation Prices," Papers 9502, Southern California - Department of Economics.
  11. Hong, Han & Shum, Matthew, 2002. "Increasing Competition and the Winner's Curse: Evidence from Procurement," Review of Economic Studies, Blackwell Publishing, vol. 69(4), pages 871-98, October.
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  12. Susan Athey & Philip A. Haile, 2002. "Identification of Standard Auction Models," Econometrica, Econometric Society, vol. 70(6), pages 2107-2140, November. [Downloadable!] (restricted)
  13. Mireia Jofre-Bonet & Martin Pesendorfer, 2003. "Estimation of a Dynamic Auction Game," Econometrica, Econometric Society, vol. 71(5), pages 1443-1489, 09. [Downloadable!] (restricted)
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  14. repec:att:wimass:1920013 is not listed on IDEAS
  15. Patrick Bajari & Lixin Ye, 2003. "Deciding Between Competition and Collusion," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 971-989, November. [Downloadable!] (restricted)
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  16. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September. [Downloadable!] (restricted)
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  17. Donald, Stephen G & Paarsch, Harry J, 1993. "Piecewise Pseudo-maximum Likelihood Estimation in Empirical Models of Auctions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 121-48, February. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. De Silva, Dakshina & Kosmopoulou, Georgia & Lamarche, Carlos, 2007. "The Effect of Information on the Bidding and Survival of Entrants in Procurement Auctions," MPRA Paper 5236, University Library of Munich, Germany. [Downloadable!]
  2. Patrick Bajari & Stephanie Houghton & Steve Tadelis, 2006. "Bidding for Incomplete Contracts: An Empirical Analysis," NBER Working Papers 12051, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. William C. Horrace & Christopher F. Parmeter, 2008. "Semiparametric Deconvolution with Unknown Error Variance," Center for Policy Research Working Papers 104, Center for Policy Research, Maxwell School, Syracuse University. [Downloadable!]
  4. Henderson, Daniel J. & List, John A. & Millimet, Daniel L. & Parmeter, Christopher F. & Price, Michael K., 2008. "Imposing Monotonicity Nonparametrically in First-Price Auctions," MPRA Paper 8769, University Library of Munich, Germany. [Downloadable!]
  5. Cantillon, Estelle & Pesendorfer, Martin, 2007. "Combination Bidding in Multi-Unit Auctions," CEPR Discussion Papers 6083, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. Patrick Bajari & Jeremy T. Fox, 2004. "Should Governments Auction Nationwide Spectrum Licenses? Estimating Bidder Valuations," Working Papers 04-15, NET Institute, revised Sep 2004. [Downloadable!]
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