Why are bids not more unbalanced?

Svante Mandell and Johan Nyström ()
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Johan Nyström: VTI, Postal: Centrum för Transportstudier (CTS), Teknikringen 10, 100 44 Stockholm, Sweden

No 2011:13, Working papers in Transport Economics from CTS - Centre for Transport Studies Stockholm (KTH and VTI)

Abstract: Earlier theoretical models of unbalanced bidding in unit price contracts (UPC) ofter predict corner solutions, i.e. zero bids for unit prices of expected overextimated quantities. However, anecdotal evidence indicates a lack of zero bids in the actual contracts. We pursue a possible explanation for this anomaly in risk-aversion of the contractor. Using a simple model we show that a contractor with superior information may exploit this in the bidding process to increase her expectd revenue. However, in so doing she increases her risk exposure. If the contractor is risk-averse, she typically will avoid a corner solution to this risk vs. expected return trade-off.

Keywords: Unbalanced bidding; risk; modelling; unit price contraction; public procurement (search for similar items in EconPapers)
JEL-codes: D82 D86 H51 L51 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2011-11-02
New Economics Papers: this item is included in nep-cta, nep-mic and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:ctswps:2011_013

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