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Identification and Estimation in Highway Procurement Auctions under Unobserved Auction Heterogeneity

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  • Elena Krasnokutskaya

    ()
    (Department of Economics, University of Pennsylvania)

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    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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    File URL: http://economics.sas.upenn.edu/system/files/working-papers/05-006.pdf
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    Bibliographic Info

    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
    Date of revision:
    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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    References

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    1. Hardle, W., 1992. "Applied Nonparametric Methods," Papers, Catholique de Louvain - Institut de statistique 9204, Catholique de Louvain - Institut de statistique.
    2. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Robert H. Porter & J. Douglas Zona, 1992. "Detection of Bid Rigging in Procurement Auctions," NBER Working Papers 4013, National Bureau of Economic Research, Inc.
    4. Mireia Jofre-Bonet & Martin Pesendorfer, 2001. "Estimation of a Dynamic Auction Game," NBER Working Papers 8626, National Bureau of Economic Research, Inc.
    5. Hong, Han & Shum, Matthew, 2002. "Increasing Competition and the Winner's Curse: Evidence from Procurement," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 69(4), pages 871-98, October.
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    10. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 125-42, February.
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    23. repec:wop:humbsf:2000-72 is not listed on IDEAS
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    Cited by:
    1. Estelle Cantillon & Martin Pesendorfer, . "Combination Bidding in Multi-unit Auctions," ULB Institutional Repository, ULB -- Universite Libre de Bruxelles 2013/151705, ULB -- Universite Libre de Bruxelles.
    2. De Silva, Dakshina G. & Kosmopoulou, Georgia & Lamarche, Carlos, 2009. "The effect of information on the bidding and survival of entrants in procurement auctions," Journal of Public Economics, Elsevier, Elsevier, vol. 93(1-2), pages 56-72, February.
    3. 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.
    4. Patrick Bajari & Stephanie Houghton & Steve Tadelis, 2006. "Bidding for Incomplete Contracts: An Empirical Analysis," NBER Working Papers 12051, National Bureau of Economic Research, Inc.
    5. Katzman, Brett & Reif, Julian & Schwartz, Jesse A., 2010. "The relation between variance and information rent in auctions," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 28(2), pages 127-130, March.
    6. William C. Horrace & Christopher F. Parmeter, 2008. "Semiparametric Deconvolution with Unknown Error Variance," Center for Policy Research Working Papers, Center for Policy Research, Maxwell School, Syracuse University 104, Center for Policy Research, Maxwell School, Syracuse University.
    7. Tukiainen, Janne, 2008. "Testing for common costs in the City of Helsinki bus transit auctions," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(6), pages 1308-1322, November.

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