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An Experimental Study of Bidding Behavior in Subcontract Auctions


  • Jun Nakabayashi
  • Naoki Watanabe


It is commonly observed in practices that prime contractors solicit subcontract bids, prior to submitting their bids in procurement auctions: the auctioneers in subcontract auctions will become bidders in a procurement auction. This point is remarkably different from the standard theory of procurement auction. We presented a simple model of such subcontract auctions and conducted a laboratory experiment to examine the bidding behavior derived theoretically. We observed that in the subcontract auction, (1) subjects bid following the equilibrium bidding function derived theoretically, (2) the revenue equivalence between first-price and second-price mechanisms breaks down, and (3) the first-price mechanism more likely achieves ex post efficient allocations than the second-price mechanism.

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  • Jun Nakabayashi & Naoki Watanabe, 2010. "An Experimental Study of Bidding Behavior in Subcontract Auctions," Tsukuba Economics Working Papers 2010-009, Economics, Graduate School of Humanities and Social Sciences, University of Tsukuba.
  • Handle: RePEc:tsu:tewpjp:2010-009

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    References listed on IDEAS

    1. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2002. "Quantal Response Equilibrium and Overbidding in Private-Value Auctions," Journal of Economic Theory, Elsevier, vol. 104(1), pages 247-272, May.
    2. Hong, Chew Soo & Nishimura, Naoko, 2003. "Revenue non-equivalence between the English and the second-price auctions: experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 51(4), pages 443-458, August.
    3. Cox, James C. & Smith, Vernon L. & Walker, James M., 1982. "Auction market theory of heterogeneous bidders," Economics Letters, Elsevier, vol. 9(4), pages 319-325.
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    Cited by:

    1. In Lee, 1999. "Non-cooperative Tacit Collusion, Complementary Bidding and Incumbency Premium," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 15(2), pages 115-134, September.
    2. Rosa, Benjamin, 2016. "Subcontracting Requirements and the Cost of Government Procurement," MPRA Paper 77392, University Library of Munich, Germany.

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