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Auctions that are too good to be true

Author

Listed:
  • Decarolis, Francesco
  • Klein, Michael

Abstract

Auctions are supposed to procure the best deal money can buy. Yet, practitioners who procure complex contracts by auction are well aware of some basic pitfalls. One concern is that winning bids may not reflect the quality of the bidder but strategic behavior like low-balling bids or underestimating costs. Such behavior may then lead to demands for contract renegotiation by the winning bidder that are hard to resist. The problem plagues complex contracts for civil works or equipment as well as contracts for various types of public-private partnerships. In 1993 two engineering professors proposed a bidding scheme that aims at preventing excessively low bids. Effectively they developed a way to disqualify bids that are “too good to be true”. Several countries, including Colombia, Italy, China, Chile, Japan, Peru and Taiwan have adopted such auction schemes. However, it turns out that the new auctions give rise to new forms of strategic bidding behavior, which create even bigger problems2. Altogether, the new auctions seem to be “too good to be true”. Using standard procedures like first price sealed bid auctions remains best practice as long as well-established disciplines for pre-qualification and control of post-bid behavior are maintained.

Suggested Citation

  • Decarolis, Francesco & Klein, Michael, 2012. "Auctions that are too good to be true," Frankfurt School - Working Paper Series 186, Frankfurt School of Finance and Management.
  • Handle: RePEc:zbw:fsfmwp:186
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    Cited by:

    1. Inklaar, Robert & Koetter, Michael & Noth, Felix, 2012. "Who's afraid of big bad banks? Bank competition, SME, and industry growth," Frankfurt School - Working Paper Series 197, Frankfurt School of Finance and Management.
    2. Dietmar Harhoff & Elisabeth Mueller & John Reenen, 2014. "What are the Channels for Technology Sourcing? Panel Data Evidence from German Companies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 23(1), pages 204-224, March.
    3. Boeing, Philipp & Mueller, Elisabeth & Sandner, Philipp, 2012. "What makes Chinese firms productive? Learning from indigenous and foreign sources of knowledge," Frankfurt School - Working Paper Series 196, Frankfurt School of Finance and Management.
    4. Alexander Libman & Vladimir Kozlov & André Schultz, 2012. "Roving Bandits in Action: Outside Option and Governmental Predation in Autocracies," Kyklos, Wiley Blackwell, vol. 65(4), pages 526-562, November.
    5. Böing, Philipp & Müller, Elisabeth, 2012. "Technological Capabilities of Chinese Enterprises: Who is Going to Compete Abroad?," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62081, Verein für Socialpolitik / German Economic Association.

    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities

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