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Investment incentives in procurement auctions

  • Leandro Arozamena
  • Estelle Cantillon

This paper investigates firms' incentives to invest in cost reduction in the first price sealed bid auction, a format largely used for procurement. Two central features of the model are that we allow firms to be heterogeneous and that investment is observable. We find that firms will tend to underinvest in cost reduction because they anticipate fiercer head-on competition. Using the second price auction as a benchmark, we also find that the first price auction will elicit less investment from market participants and that this is socially inefficient. These results have implications for market design when investment is important. Copyright The Review of Economic Studies Limited, 2004.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/9005.

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Date of creation: 2004
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Publication status: Published in: The Review of Economic Studies (2004) v.71 n° 1,p.1-18
Handle: RePEc:ulb:ulbeco:2013/9005
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