A Secret Worth Keeping? Bid Cap Design in Budget-Constrained Procurement Auctions

Josephine Auer, Lana Friesen () and Ian MacKenzie
Additional contact information
Josephine Auer: JDepartment of Economics, MIT, Cambridge
Lana Friesen: School of Economics, University of Queensland

No 672, Discussion Papers Series from University of Queensland, School of Economics

Abstract: This article investigates the existence of bid caps in budget-constrained procurement auctions. We analyze the design and (non)disclosure of a bid cap and how this impacts aggregate market outcomes and strategic bidding behavior in a budget-constrained envi-ronment. We use a laboratory experiment to analyze two potential bid cap designs—a disclosed versus undisclosed bid cap—as well as comparing both to a baseline case without a bid cap. We find adoption of either a disclosed or non-disclosed cap significantly im-proves cost effectiveness. A non-disclosed cap, however, significantly increases the informa-tion rent to participants and, consequently, performs relatively worse than a disclosed cap. We consider two common but distinct auction formats (discriminatory ‘pay-your-bid’ and a uniform price) and show that a discriminatory auction improves cost effectiveness com-pared to a uniform-price auction when the cap is disclosed. Our findings have important policy implications that demonstrate the benefits of implementing bid caps for improving budgetary cost-effectiveness while highlighting potential tradeoffs between efficiency and worsening information rents.

Keywords: auction; experiment; bid cap; procurement (search for similar items in EconPapers)
JEL-codes: C91 C92 D44 H57 (search for similar items in EconPapers)
Date: 2026-02
References: Add references at CitEc
Citations:

Downloads: (external link)
https://economics.uq.edu.au/files/54597/672.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:qld:uq2004:672

Access Statistics for this paper

More papers in Discussion Papers Series from University of Queensland, School of Economics Contact information at EDIRC.
Bibliographic data for series maintained by SOE IT ().