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Procurement Auctions with Pre-award Subcontracting

Listed author(s):
  • Jun Nakabayashi

To be the lowest bidder in procurement auctions, prime contractors commonly solicit subcontract bids at the bid preparation stage. A remarkable feature of the subcontract competition is that "winning is not everything"; the lowest subcontractor gets a job conditional on his prime contractor's successful bid. This paper makes the first attempt to establish a model for such pre-award subcontract competitions included in procurement auctions. I find that subcontractors strategically provide larger discounts on their bids in response to increasing competition among prime contractors. I thus clarify that the behavior results in an endogenous downward shift in the distribution of bidders' private information in the downstream auction as the number of rivals increases, or the reservation price drops. The result has a striking impact on the analysis of optimal reservation price and empirical identification of the bidder's cost distribution in procurement auctions.

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Paper provided by Economics, Graduate School of Humanities and Social Sciences, University of Tsukuba in its series Tsukuba Economics Working Papers with number 2009-013.

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Date of creation: Oct 2009
Date of revision: Jul 2010
Handle: RePEc:tsu:tewpjp:2009-013
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