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Why are bids not more unbalanced?


  • Mandell, Svante

    () (VTI)

  • Nyström, Johan

    () (VTI)


Earlier theoretical models of unbalanced bidding in unit price contracts (UPC) ofter predict corner solutions, i.e. zero bids for unit prices of expected overextimated quantities. However, anecdotal evidence indicates a lack of zero bids in the actual contracts. We pursue a possible explanation for this anomaly in risk-aversion of the contractor. Using a simple model we show that a contractor with superior information may exploit this in the bidding process to increase her expectd revenue. However, in so doing she increases her risk exposure. If the contractor is risk-averse, she typically will avoid a corner solution to this risk vs. expected return trade-off.

Suggested Citation

  • Mandell, Svante & Nyström, Johan, 2011. "Why are bids not more unbalanced?," Working papers in Transport Economics 2011:13, CTS - Centre for Transport Studies Stockholm (KTH and VTI).
  • Handle: RePEc:hhs:ctswps:2011_013

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    References listed on IDEAS

    1. Susan Athey & Jonathan Levin, 2001. "Information and Competition in U.S. Forest Service Timber Auctions," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 375-417, April.
    2. David Arditi & Ranon Chotibhongs, 2009. "Detection and prevention of unbalanced bids," Construction Management and Economics, Taylor & Francis Journals, vol. 27(8), pages 721-732.
    3. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
    4. Ewerhart, Christian & Fieseler, Karsten, 2003. " Procurement Auctions and Unit-Price Contracts," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 569-581, Autumn.
    5. David William Cattell & Paul Anthony Bowen & Ammar Kaka, 2010. "The risks of unbalanced bidding," Construction Management and Economics, Taylor & Francis Journals, vol. 28(4), pages 333-344.
    6. David William Cattell & Paul Anthony Bowen & Ammar Kaka, 2008. "A simplified unbalanced bidding model," Construction Management and Economics, Taylor & Francis Journals, vol. 26(12), pages 1283-1290.
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    More about this item


    Unbalanced bidding; risk; modelling; unit price contraction; public procurement;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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