IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

Bidding for Incomplete Contracts: An Empirical Analysis

  • Patrick Bajari
  • Stephanie Houghton
  • Steve Tadelis

Procurement contracts are often incomplete because the initial plans and specifications are changed and refined after the contract is awarded to the lowest bidder. This results in a final cost to the buyer that differs from the low bid, and may also involve significant adaptation and renegotiation costs. We propose a stylized model of bidding for incomplete contracts and apply it to data from highway paving contracts. Reduced form regressions suggest that bidders respond strategically to contractual incompleteness and that adaptation costs, broadly defined, are an important determinant of the observed bids. We then estimate the costs of adaptation and bidder markups using a structural auction model. The estimates suggest that adaptation costs on average account for about ten percent of the winning bid. The distortions from private information and local market power, which are the focus on much of the literature on optimal procurement mechanisms, are much smaller by comparison.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/papers/w12051.pdf
Download Restriction: no

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12051.

as
in new window

Length:
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:nbr:nberwo:12051
Note: IO
Contact details of provider: Postal:
National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.

Phone: 617-868-3900
Web page: http://www.nber.org
Email:


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.:

as in new window
  1. Newey, Whitney K, 1994. "The Asymptotic Variance of Semiparametric Estimators," Econometrica, Econometric Society, vol. 62(6), pages 1349-82, November.
  2. Patrick Bajari & Steven Tadelis, 1999. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," Working Papers 99029, Stanford University, Department of Economics.
  3. Han Hong & Matthew Shum, 2001. "Increasing Competition and the Winner's Curse: Evidence from Procurement," Economics Working Paper Archive 447, The Johns Hopkins University,Department of Economics.
  4. Ariel Pakes, 2003. "Common Sense and Simplicity in Empirical Industrial Organization," Review of Industrial Organization, Springer, vol. 23(3_4), pages 193-215, December.
  5. Patrick Bajari & Robert McMillan & Steven Tadelis, . "Auctions versus Negotiations in Procurement: An Empirical Analysis," Working Papers 02007, Stanford University, Department of Economics.
  6. John Asker & Estelle Cantillon, 2008. "Properties of scoring auctions," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 69-85.
  7. Kenneth Hendricks & Joris Pinkse & Robert H. Porter, 2003. "Empirical Implications of Equilibrium Bidding in First-Price, Symmetric, Common Value Auctions," Review of Economic Studies, Oxford University Press, vol. 70(1), pages 115-145.
  8. repec:pri:indrel:495 is not listed on IDEAS
  9. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  10. repec:adr:anecst:y:1994:i:34:p:04 is not listed on IDEAS
  11. Elyakime, Bernard & Laffont, Jean-Jacques & Loisel, Patrice & Vuong, Quang, 1993. "First-Price Sealed-Bid Auctions with Secret Reservation Prices," IDEI Working Papers 27, Institut d'Économie Industrielle (IDEI), Toulouse.
  12. Bajari, Patrick & Hortacsu, Ali, 2003. " The Winner's Curse, Reserve Prices, and Endogenous Entry: Empirical Insights from eBay Auctions," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 329-55, Summer.
  13. Surajeet Chakravarty & Bentley MacLeod, 2004. "On the Efficiency of Standard Contracts the Case of Construction," Working Papers 874, Princeton University, Department of Economics, Industrial Relations Section..
  14. Patrick Bajari & Lixin Ye, 2001. "Deciding Between Competition and Collusion," Working Papers 01008, Stanford University, Department of Economics.
  15. Donald, S.G. & Paarsch, H.J., 1992. "Maximum Likelihood Estimation in Empirical Models of Auctions," UWO Department of Economics Working Papers 9211, University of Western Ontario, Department of Economics.
  16. Levin, Jonathan & Athey, Susan, 2001. "Information and Competition in U.S. Forest Service Timber Auctions," Scholarly Articles 3612768, Harvard University Department of Economics.
  17. Mireia Jofre-Bonet & Martin Pesendorfer, 2001. "Estimation of a Dynamic Auction Game," NBER Working Papers 8626, National Bureau of Economic Research, Inc.
  18. Sandra Campo & Emmanuel Guerre & Isabelle Perrigne & Quang Vuong, 2003. "Semiparametric Estimation of First-price Auctions with Risk Averse Bidders," Working Papers 2003-09, Centre de Recherche en Economie et Statistique.
  19. Yeon-Koo Che, 1993. "Design Competition through Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 668-680, Winter.
  20. Martin Loosemore, 1999. "Bargaining tactics in construction disputes," Construction Management and Economics, Taylor & Francis Journals, vol. 17(2), pages 177-188.
  21. Paul R. Milgrom., 1987. "Employment Contracts, Influence Activities and Efficient Organization Design," Economics Working Papers 8741, University of California at Berkeley.
  22. Jonathan Levin & Susan Athey & Enrique Seira, 2004. "Comparing Open and Sealed Bid Auctions: Theory and Evidence from Timber Auctions," Working Papers 2004.142, Fondazione Eni Enrico Mattei.
  23. Kenneth S. Corts, 2004. "The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling," Journal of Law, Economics and Organization, Oxford University Press, vol. 20(1), pages 230-260, April.
  24. Keith J. Crocker & Kenneth J. Reynolds, 1993. "The Efficiency of Incomplete Contracts: An Empirical Analysis of Air Force Engine Procurement," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 126-146, Spring.
  25. Emmanuel Guerre & Isabelle Perrigne & Quang Vuong, 2000. "Optimal Nonparametric Estimation of First-Price Auctions," Econometrica, Econometric Society, vol. 68(3), pages 525-574, May.
  26. Penny Brooker, 1999. "Survey of construction lawyers' attitudes and practice in the use of ADR in contractors' disputes," Construction Management and Economics, Taylor & Francis Journals, vol. 17(6), pages 757-765.
  27. Bushnell, James B & Oren, Shmuel S, 1994. "Bidder Cost Revelation in Electric Power Auctions," Journal of Regulatory Economics, Springer, vol. 6(1), pages 5-26, February.
  28. Masten, Scott E, 1984. "The Organization of Production: Evidence from the Aerospace Industry," Journal of Law and Economics, University of Chicago Press, vol. 27(2), pages 403-17, October.
  29. Porter, Robert H & Zona, J Douglas, 1993. "Detection of Bid Rigging in Procurement Auctions," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 518-38, June.
  30. Elena Krasnokutskaya, 2004. "Identification and Estimation in Highway Procurement Auctions under Unobserved Auction Heterogeneity," PIER Working Paper Archive 05-006, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  31. Paarsch, Harry J., 1992. "Deciding between the common and private value paradigms in empirical models of auctions," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 191-215.
  32. Osband, Kent & Reichelstein, Stefan, 1985. "Information-eliciting compensation schemes," Journal of Public Economics, Elsevier, vol. 27(1), pages 107-115, June.
  33. Donald, Stephen G & Paarsch, Harry J, 1993. "Piecewise Pseudo-maximum Likelihood Estimation in Empirical Models of Auctions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 121-48, February.
  34. Cantillon, Estelle & Pesendorfer, Martin, 2007. "Combination Bidding in Multi-Unit Auctions," CEPR Discussion Papers 6083, C.E.P.R. Discussion Papers.
  35. repec:adr:anecst:y:1994:i:34 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:12051. 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: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.