A Secret Worth Keeping? Bid Cap Design in Budget-Constrained Procurement Auctions

This article investigates the existence of bid caps in budget-constrained procurement auctions. We analyze the design and (non)disclosure of a bid cap and how this impacts aggregate market outcomes and strategic bidding behavior in a budget-constrained envi-ronment. We use a laboratory experiment to analyze two potential bid cap designs—a disclosed versus undisclosed bid cap—as well as comparing both to a baseline case without a bid cap. We find adoption of either a disclosed or non-disclosed cap significantly im-proves cost effectiveness. A non-disclosed cap, however, significantly increases the informa-tion rent to participants and, consequently, performs relatively worse than a disclosed cap. We consider two common but distinct auction formats (discriminatory ‘pay-your-bid’ and a uniform price) and show that a discriminatory auction improves cost effectiveness com-pared to a uniform-price auction when the cap is disclosed. Our findings have important policy implications that demonstrate the benefits of implementing bid caps for improving budgetary cost-effectiveness while highlighting potential tradeoffs between efficiency and worsening information rents.