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Set-Asides and Subsidies in Auctions

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  • Susan Athey
  • Dominic Coey
  • Jonathan Levin

Abstract

Set-asides and subsidies are used extensively in government procurement and natural resource sales. We analyze these policies in an empirical model of U.S. Forest Service timber auctions. The model fits the data well both within the sample of unrestricted sales where we estimate the model, and when we predict (out of sample) bidder entry and prices for small business set-asides. Our estimates suggest that restricting entry to small businesses substantially reduces efficiency and revenue, although it does increase small business participation. An alternative policy of subsidizing small bidders would increase revenue and small bidder profit, while eliminating almost all of the efficiency loss of set-asides, and only slightly decreasing the profit of larger firms. We explain these findings by connecting to the theory of optimal auction design.

Suggested Citation

  • Susan Athey & Dominic Coey & Jonathan Levin, 2011. "Set-Asides and Subsidies in Auctions," NBER Working Papers 16851, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16851
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    References listed on IDEAS

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    1. Emmanuel Guerre & Isabelle Perrigne & Quang Vuong, 2000. "Optimal Nonparametric Estimation of First-Price Auctions," Econometrica, Econometric Society, vol. 68(3), pages 525-574, May.
    2. McAfee, R. Preston & McMillan, John, 1989. "Government procurement and international trade," Journal of International Economics, Elsevier, vol. 26(3-4), pages 291-308, May.
    3. Susan Athey & Philip A. Haile, 2002. "Identification of Standard Auction Models," Econometrica, Econometric Society, vol. 70(6), pages 2107-2140, November.
    4. Philip A. Haile & Han Hong & Matthew Shum, 2003. "Nonparametric Tests for Common Values at First-Price Sealed-Bid Auctions," NBER Working Papers 10105, National Bureau of Economic Research, Inc.
    5. Philip A. Haile, 2001. "Auctions with Resale Markets: An Application to U.S. Forest Service Timber Sales," American Economic Review, American Economic Association, vol. 91(3), pages 399-427, June.
    6. 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.
    7. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521536721, April.
    8. Lance Brannman & Luke M. Froeb, 2000. "Mergers, Cartels, Set-Asides, and Bidding Preferences in Asymmetric Oral Auctions," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 283-290, May.
    9. Tong Li, 2005. "Econometrics of first-price auctions with entry and binding reservation prices," Journal of Econometrics, Elsevier, vol. 126(1), pages 173-200, May.
    10. Athey, Susan, 2001. "Single Crossing Properties and the Existence of Pure Strategy Equilibria in Games of Incomplete Information," Econometrica, Econometric Society, vol. 69(4), pages 861-889, July.
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    Citations

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    Cited by:

    1. Vivek Bhattacharya & James W. Roberts & Andrew Sweeting, 2014. "Regulating bidder participation in auctions," RAND Journal of Economics, RAND Corporation, vol. 45(4), pages 675-704, December.
    2. Gugler, Klaus & Weichselbaumer, Michael & Zulehner, Christine, 2015. "Competition in the economic crisis: Analysis of procurement auctions," European Economic Review, Elsevier, vol. 73(C), pages 35-57.
    3. Sweeting, Andrew & Bhattacharya, Vivek, 2015. "Selective entry and auction design," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 189-207.
    4. Laurent Lamy & Philippe Jehiel, 2016. "On the benefits of set-asides," Post-Print hal-01688237, HAL.
    5. Manzano, Carolina & Vives, Xavier, 2016. "Market Power and Welfare in Asymmetric Divisible Good Auctions," CEPR Discussion Papers 11731, C.E.P.R. Discussion Papers.
    6. Daniel Garrett & Andrey Ordin & James W. Roberts & Juan Carlos Suárez Serrato, 2017. "Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds," NBER Working Papers 23473, National Bureau of Economic Research, Inc.
    7. Jeffrey V. Butler & Enrica Carbone & Pierluigi Conzo & Giancarlo Spagnolo, 2012. "Reputation and Entry," EIEF Working Papers Series 1215, Einaudi Institute for Economics and Finance (EIEF), revised Nov 2012.
    8. repec:bla:jomstd:v:54:y:2017:i:6:p:823-853 is not listed on IDEAS
    9. Klenio Barbosa & Pierre C. Boyer, 2012. "Discrimination in Dynamic Procurement Design with Learning-by-doing," CESifo Working Paper Series 3947, CESifo Group Munich.
    10. James W. Roberts & Andrew Sweeting, 2013. "When Should Sellers Use Auctions?," American Economic Review, American Economic Association, vol. 103(5), pages 1830-1861, August.
    11. Yosef Mealem & Shmuel Nitzan, 2016. "Discrimination in contests: a survey," Review of Economic Design, Springer;Society for Economic Design, vol. 20(2), pages 145-172, June.
    12. Kirkegaard, René, 2013. "Handicaps in incomplete information all-pay auctions with a diverse set of bidders," European Economic Review, Elsevier, vol. 64(C), pages 98-110.
    13. Brown, David, 2014. "The Effect of Subsidized Entry on Capacity Auctions and the Long-Run Resource Adequacy of Electricity Markets," Working Papers 2014-7, University of Alberta, Department of Economics.
    14. Jehiel, Philippe & Lamy, Laurent, 2014. "On discrimination in procurement auctions," CEPR Discussion Papers 9790, C.E.P.R. Discussion Papers.
    15. James W. Roberts & Andrew Sweeting, 2016. "Bailouts and the Preservation of Competition: The Case of the Federal Timber Contract Payment Modification Act," American Economic Journal: Microeconomics, American Economic Association, vol. 8(3), pages 257-288, August.
    16. Che, Yeon-Koo & Gale, Ian & Kim, Jinwoo, 2013. "Efficient assignment mechanisms for liquidity-constrained agents," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 659-665.
    17. Rosa, Benjamin, 2016. "Resident Bid Preference, Affiliation, and Procurement Competition: Evidence from New Mexico," MPRA Paper 68759, University Library of Munich, Germany.
    18. Ari Hyytinen & Sofia Lundberg & Otto Toivanen, 2015. " Design of public procurement auctions: Evidence from cleaning contracts," Working Papers Department of Managerial Economics, Strategy and Innovation (MSI) 483670, KU Leuven, Faculty of Economics and Business, Department of Managerial Economics, Strategy and Innovation (MSI).
    19. Georgia Kosmopoulou & Carlos Lamarche & Xueqi Zhou, 2016. "Price Adjustment Policies And Firm Size," Economic Inquiry, Western Economic Association International, vol. 54(2), pages 895-906, April.
    20. Nakabayashi, Jun, 2013. "Small business set-asides in procurement auctions: An empirical analysis," Journal of Public Economics, Elsevier, vol. 100(C), pages 28-44.
    21. repec:eee:eneeco:v:70:y:2018:i:c:p:205-232 is not listed on IDEAS
    22. Rahul Deb & Mallesh Pai, 2013. "Symmetric Auctions," Working Papers tecipa-486, University of Toronto, Department of Economics.
    23. Dominic Coey & Bradley Larsen & Kane Sweeney, 2014. "The Bidder Exclusion Effect," NBER Working Papers 20523, National Bureau of Economic Research, Inc.
    24. Rosa, Benjamin, 2016. "Subcontracting Requirements and the Cost of Government Procurement," MPRA Paper 77392, University Library of Munich, Germany.
    25. repec:the:publsh:1824 is not listed on IDEAS

    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • L53 - Industrial Organization - - Regulation and Industrial Policy - - - Enterprise Policy

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