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Increasing Competition and the Winner's Curse: Evidence from Procurement

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  • Han Hong
  • Matthew Shum

Abstract

We assess empirically the effects of the winner's curse which, in common-value auctions, counsels more conservative bidding as the number of competitors increases. First, we construct an econometric model of an auction in which bidders' preferences have both common- and private-value components, and propose a new monotone quantile approach which facilitates estimation of this model. Second, we estimate the model using bids from procurement auctions held by the State of New Jersey. For a large subset of these auctions, we find that median procurement costs rise as competition intensifies. In this setting, then, asymmetric information overturns the common economic wisdom that more competition is always desirable. Copyright 2002, Wiley-Blackwell.

Suggested Citation

  • Han Hong & Matthew Shum, 2002. "Increasing Competition and the Winner's Curse: Evidence from Procurement," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 871-898.
  • Handle: RePEc:oup:restud:v:69:y:2002:i:4:p:871-898
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    File URL: http://hdl.handle.net/10.1111/1467-937X.00229
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