Scaling Auctions as Insurance: A Case Study in Infrastructure Procurement

Valentin Bolotnyy and Shoshana Vasserman

Econometrica, 2023, vol. 91, issue 4, 1205-1259

Abstract: Most U.S. government spending on highways and bridges is done through “scaling” procurement auctions, in which private construction firms submit unit price bids for each piece of material required to complete a project. Using data on bridge maintenance projects undertaken by the Massachusetts Department of Transportation (MassDOT), we present evidence that firm bidding behavior in this context is consistent with optimal skewing under risk aversion: firms limit their risk exposure by placing lower unit bids on items with greater uncertainty. We estimate the amount of uncertainty in each auction, and the distribution of bidders' private costs and risk aversion. Simulating equilibrium item‐level bids under counterfactual settings, we estimate the fraction of project spending that is due to risk and evaluate auction mechanisms under consideration by policymakers. We find that scaling auctions provide substantial savings relative to lump sum auctions and show how our framework can be used to evaluate alternative auction designs.

Date: 2023
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https://doi.org/10.3982/ECTA17673

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Working Paper: Scaling Auctions as Insurance: A Case Study in Infrastructure Procurement (2023)
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