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Bidder asymmetry in infrastructure procurement : are there any fringe bidders ?

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  • Estache, Antonio
  • Iimi, Atsushi

Abstract

Asymmetric auctions are among the most rapidly growing areas in the auction literature. The potential benefits from improved auction efficiency are expected to be enormous in public procurement auctions related to official development projects. Entrant bidders are considered a key to enhance competition in an auction and break potential collusive arrangements among incumbent bidders. Asymmetric auction theory predicts that weak (fringe) bidders would bid more aggressively when they are faced with a strong (incumbent) opponent. Using official development assistance procurement data, this paper finds that in the major infrastructure sectors, entrants submitted systematically aggressive bids in the presence of an incumbent bidder. The findings also show that a high concentration of incumbents in an auction would harm auction efficiency, raising procurement costs. The results suggest that auctioneers should encourage fringe bidders to actively participate in the bidding process while maintaining the quality of the projects. This is conducive to enhancing competitive circumstances in public procurements and improving allocative efficiency.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4660.

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Date of creation: 01 Jul 2008
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Handle: RePEc:wbk:wbrwps:4660

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Keywords: Investment and Investment Climate; Government Procurement; Debt Markets; E-Business; Infrastructure Economics;

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References

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  1. Omar Arias & Walter Sosa-Escudero & Kevin F. Hallock, 2001. "Individual heterogeneity in the returns to schooling: instrumental variables quantile regression using twins data," Empirical Economics, Springer, Springer, vol. 26(1), pages 7-40.
  2. Antonio Estache & A. Iimi, 2009. "Joint Bidding, Governance and Public Procurement Costs: A case of road projects," ULB Institutional Repository 2013/43906, ULB -- Universite Libre de Bruxelles.
  3. Srabana Gupta, 2002. "Competition and collusion in a government procurement auction market," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 30(1), pages 13-25, March.
  4. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, American Economic Association, vol. 84(3), pages 585-99, June.
  5. Patrick Bajari & Robert S. McMillan & Steve Tadelis, 2003. "Auctions Versus Negotiations in Procurement: An Empirical Analysis," NBER Working Papers 9757, National Bureau of Economic Research, Inc.
  6. De Silva, Dakshina G. & Dunne, Timothy & Kosmopoulou, Georgia, 2002. "Sequential bidding in auctions of construction contracts," Economics Letters, Elsevier, Elsevier, vol. 76(2), pages 239-244, July.
  7. Benjamin Olken, 2005. "Monitoring corruption: Evidence from a field experiment in indonesia," Natural Field Experiments, The Field Experiments Website 00317, The Field Experiments Website.
  8. Zheng, Charles Zhoucheng, 2001. "High Bids and Broke Winners," Staff General Research Papers 12665, Iowa State University, Department of Economics.
  9. repec:rne:rneart:v:4:y:2005:i:3:p:220-242 is not listed on IDEAS
  10. Estache, Antonio & Iimi, Atsushi, 2008. "Procurement efficiency for infrastructure development and financial needs reassessed," Policy Research Working Paper Series 4662, The World Bank.
  11. Maskin, Eric & Riley, John, 2000. "Asymmetric Auctions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 67(3), pages 413-38, July.
  12. Atsushi Iimi, 2006. "Auction Reforms for Effective Official Development Assistance," Review of Industrial Organization, Springer, Springer, vol. 28(2), pages 109-128, 03.
  13. Tong Li & Isabelle Perrigne, 2003. "Timber Sale Auctions with Random Reserve Prices," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 189-200, February.
  14. Antonio Estache & D. Benitez, 2005. "How concentrated are global infrastructure markets?," ULB Institutional Repository 2013/43970, ULB -- Universite Libre de Bruxelles.
  15. repec:wop:humbsf:2000-72 is not listed on IDEAS
  16. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, Elsevier, vol. 23(4), pages 343-347.
  17. Tong Li & Xiaoyong Zheng, 2006. "Entry and competition effects in first-price auctions: theory and evidence from procurement auctions," CeMMAP working papers, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP13/06, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  18. Dakshina G. De Silva & Timothy Dunne & Georgia Kosmopoulou, 2003. "An Empirical Analysis of Entrant and Incumbent Bidding in Road Construction Auctions," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 295-316, 09.
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Cited by:
  1. Antonio Estache & A. Iimi, 2009. "Auctions with Endogenous Participation and Quality Thresholds: Evidence from ODA Infrastructure Procurement," Working Papers ECARES, ULB -- Universite Libre de Bruxelles 2009_006, ULB -- Universite Libre de Bruxelles.
  2. Atsushi Iimi, 2013. "Testing Low-Balling Strategy in Rural Road Procurement," Review of Industrial Organization, Springer, Springer, vol. 43(3), pages 243-261, November.
  3. Sheng Li & Peter Philips, 2012. "Construction Procurement Auctions: Do Entrant Bidders Employ More Aggressive Strategies than Incumbent Bidders?," Review of Industrial Organization, Springer, Springer, vol. 40(3), pages 191-205, May.

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