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Is Subsidizing Inefficient Bidders Actually Costly?

Author

Listed:
  • Michael H. Rothkopf

    () (Rutgers Business School and RUTCOR, Rutgers University, 640 Bartholomew Road, Piscataway, New Jersey 08854-8003)

  • Ronald M. Harstad

    () (Rutgers Business School and RUTCOR, Rutgers University, 640 Bartholomew Road, Piscataway, New Jersey 08854-8003)

  • Yuhong Fu

    () (Moody's, 96 Church Street, New York, New York 10007)

Abstract

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.

Suggested Citation

  • Michael H. Rothkopf & Ronald M. Harstad & Yuhong Fu, 2003. "Is Subsidizing Inefficient Bidders Actually Costly?," Management Science, INFORMS, vol. 49(1), pages 71-84, January.
  • Handle: RePEc:inm:ormnsc:v:49:y:2003:i:1:p:71-84
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    File URL: http://dx.doi.org/10.1287/mnsc.49.1.71.12748
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    References listed on IDEAS

    as
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    8. Michael H. Rothkopf, 1969. "A Model of Rational Competitive Bidding," Management Science, INFORMS, vol. 15(7), pages 362-373, March.
    9. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
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    13. 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 125-142, February.
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Jeremy Bulow & Paul Klemperer, 2009. "Why Do Sellers (Usually) Prefer Auctions?," American Economic Review, American Economic Association, vol. 99(4), pages 1544-1575, September.
    2. Manlove, Jacob & Whitacre, Brian, 2017. "Short-Term Economic Impact of Rural Hospital Closures," 2017 Annual Meeting, February 4-7, 2017, Mobile, Alabama 252716, Southern Agricultural Economics Association.
    3. Colucci, Domenico & Doni, Nicola & Valori, Vincenzo, 2012. "Preferential treatment in procurement auctions through information revelation," Economics Letters, Elsevier, vol. 117(3), pages 883-886.
    4. Kerschbamer, Rudolf & Tournas, Yanni, 2003. "In-house competition, organizational slack, and the business cycle," European Economic Review, Elsevier, vol. 47(3), pages 505-520, June.
    5. Domenico Colucci & Nicola Doni & Vincenzo Valori, 2012. "Information revelation in procurement auctions: an equivalence result," Working Papers - Mathematical Economics 2012-07, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    6. Vincent van den Berg, 2013. "Over- and Under-Bidding in Tendering," Tinbergen Institute Discussion Papers 13-033/VIII, Tinbergen Institute.
    7. Alcalde, José & Dahm, Matthias, 2013. "Competition for procurement shares," Games and Economic Behavior, Elsevier, vol. 80(C), pages 193-208.
    8. Vincent van den Berg, 2012. "Advantaged Bidders in Franchise Auctions," Tinbergen Institute Discussion Papers 12-117/VIII, Tinbergen Institute.
    9. Hu, Audrey & Offerman, Theo & Zou, Liang, 2011. "Premium auctions and risk preferences," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2420-2439.
    10. Marion, Justin, 2007. "Are bid preferences benign? The effect of small business subsidies in highway procurement auctions," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1591-1624, August.
    11. Pai, Mallesh M. & Vohra, Rakesh, 2014. "Optimal auctions with financially constrained buyers," Journal of Economic Theory, Elsevier, vol. 150(C), pages 383-425.
    12. Dahm, Matthias & Esteve, Patrícia,, 2013. "Affirmative Action through Extra Prizes," Working Papers 2072/222197, Universitat Rovira i Virgili, Department of Economics.
    13. Thomas W. Hazlett & Roberto E. Muñoz, 2009. "A welfare analysis of spectrum allocation policies," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 424-454.
    14. Vincent A.C. van den Berg, 2013. "Tender Auctions with Existing Operators Bidding," Tinbergen Institute Discussion Papers 13-117/VIII, Tinbergen Institute.
    15. Lee, Joon-Suk, 2008. "Favoritism in asymmetric procurement auctions," International Journal of Industrial Organization, Elsevier, vol. 26(6), pages 1407-1424, November.
    16. Domenico Colucci & Nicola Doni & Vincenzo Valori, 2015. "Information policies in procurement auctions with heterogeneous suppliers," Journal of Economics, Springer, vol. 114(3), pages 211-238, April.
    17. repec:spr:grdene:v:19:y:2010:i:2:d:10.1007_s10726-008-9117-y is not listed on IDEAS

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