Is Subsidizing Inefficient Bidders Actually Costly?
A widespread practice, particularly in public-sector procurement and dispersal, is to subsidize a class of competitors believed to be at an economic disadvantage. Arguments for such policies vary, but they typically assume that benefits of subsidization must be large enough to outweigh a presumed economic cost of the subsidy. When disadvantaged competitors compete in auctions, the subsidy serves to make them more competitive rivals. Other bidders rationally respond by bidding more aggressively. We consider a model of procurement auctions and show that a policy of subsidizing inefficient competitors can lower expected project cost and also enhance economic efficiency. Some subsidy is generally better than no subsidy for a wide range of parameters.
Volume (Year): 49 (2003)
Issue (Month): 1 (January)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
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.:
- Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-90, October.
- Branco, Fernando, 2002. "Procurement favouritism and technology adoption," European Economic Review, Elsevier, vol. 46(1), pages 73-91, January.
- Harstad, Ronald M, 1990. "Alternative Common-Value Auction Procedures: Revenue Comparisons with Free Entry," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 421-29, April.
- Robert Wilson, 1977. "A Bidding Model of Perfect Competition," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 511-518.
- Michael H. Rothkopf, 1969. "A Model of Rational Competitive Bidding," Management Science, INFORMS, vol. 15(7), pages 362-373, March.
- Milgrom, Paul R & Weber, Robert J, 1982.
"A Theory of Auctions and Competitive Bidding,"
Econometric Society, vol. 50(5), pages 1089-1122, September.
- Benjamin T. Smith & James H. Case, 1975. "Nash Equilibria in a Sealed Bid Auction," Management Science, INFORMS, vol. 22(4), pages 487-497, December.
- 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.
- Lebrun, Bernard, 1997. "First Price Auctions in the Asymmetric N Bidder Case," Cahiers de recherche 9715, Université Laval - Département d'économique.
- Michael H. Rothkopf, 1991. "On Auctions with Withdrawable Winning Bids," Marketing Science, INFORMS, vol. 10(1), pages 40-57.
- William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, 03.
- Michael H. Rothkopf & Ronald M. Harstad, 1994. "Modeling Competitive Bidding: A Critical Essay," Management Science, INFORMS, vol. 40(3), pages 364-384, March.
- Corns, Allan & Schotter, Andrew, 1996.
"Can Affirmative Action be Cost-Effective? An Experimental Examination of Price-Preference Auctions,"
96-02, C.V. Starr Center for Applied Economics, New York University.
- Andrew Schotter & Allan Corns, 1999. "Can Affirmative Action Be Cost Effective? An Experimental Examination of Price-Preference Auctions," American Economic Review, American Economic Association, vol. 89(1), pages 291-305, March.
- McAfee, R. Preston & McMillan, John, 1989. "Government procurement and international trade," Journal of International Economics, Elsevier, vol. 26(3-4), pages 291-308, May.
- Harstad, Ronald M., 1993. "Auctions With Endogenous Bidder Participation," Discussion Paper Serie B 251, University of Bonn, Germany.
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:49:y:2003:i:1:p:71-84. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If references are entirely missing, you can add them using this form.