 Bidding under auctioneer default riskPanos L. Lorentziadis Omega, 2014, vol. 49, issue C, 123-133 Abstract: In a financially turbulent economy, participants of a procurement auction should consider in their bids the event of default of the auctioneer, which may result to substantial damages for the winning bidder. We examine a sealed bid auction, with private cost values and interdependence among the beliefs of the bidders about the auctioneer׳s default risk. The probability of payment of the bid price by the auctioneer is estimated by each bidder. For a first and a second price auction, we derive equilibrium bidding strategies, which address the risk of default and optimally adjust the bid price, introducing a risk premium in the form of an additional mark-up. A numerical illustration of the proposed strategies is provided. The effect of auctioneer׳s risk of default on the procurement project cost is examined. Financial arrangements that may be used to relax or eliminate the effect of the risk of default, such as early payment methods, third party guarantees or insurance programs are discussed and evaluated in comparison with the approach of risk premium on bid price. Keywords: Procurement auction; Bidding strategy; Risk premium; Default risk (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jomega:v:49:y:2014:i:c:p:123-133 Ordering information: This journal article can be ordered from DOI: 10.1016/j.omega.2014.05.005 Access Statistics for this article Omega is currently edited by B. Lev More articles in Omega from Elsevier |
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