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Procurements with Bidder Asymmetry in Cost and Risk-Aversion

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  • Gaurab Aryal
  • Hanna Charankevich
  • Seungwon Jeong
  • Dong-Hyuk Kim

Abstract

We propose an empirical method to analyze data from first-price procurements where bidders are asymmetric in their risk-aversion (CRRA) coefficients and distributions of private costs. Our Bayesian approach evaluates the likelihood by solving type-symmetric equilibria using the boundary-value method and integrates out unobserved heterogeneity through data augmentation. We study a new dataset from Russian government procurements focusing on the category of printing papers. We find that there is no unobserved heterogeneity (presumably because the job is routine), but bidders are highly asymmetric in their cost and risk-aversion. Our counterfactual study shows that choosing a type-specific cost-minimizing reserve price marginally reduces the procurement cost; however, inviting one more bidder substantially reduces the cost, by at least 5.5%. Furthermore, incorrectly imposing risk-neutrality would severely mislead inference and policy recommendations, but the bias from imposing homogeneity in risk-aversion is small.

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  • Gaurab Aryal & Hanna Charankevich & Seungwon Jeong & Dong-Hyuk Kim, 2021. "Procurements with Bidder Asymmetry in Cost and Risk-Aversion," Papers 2111.04626, arXiv.org, revised Jul 2022.
  • Handle: RePEc:arx:papers:2111.04626
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    Cited by:

    1. Samuel Häfner, 2023. "Risk aversion in share auctions: Estimating import rents from TRQs in Switzerland," Quantitative Economics, Econometric Society, vol. 14(2), pages 419-470, May.
    2. Kim, Dong-Hyuk & Ratan, Anmol, 2022. "Disentangling risk aversion and loss aversion in first-price auctions: An empirical approach," European Economic Review, Elsevier, vol. 150(C).

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