When the highest bidder loses the auction: theory and evidence from public procurement

Francesco Decarolis

No 717, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: In this paper I study two methods often used in public procurement to deal with the risk that the winning bidder may default on his bid: augmenting the standard first price auction with an ex-post verification of the responsiveness of the bids and using an average bid auction. I show that when penalties for defaulting are asymmetric across bidders and when their valuations are characterized by a predominant common component, the average bid auction is preferred over the standard first price by an auctioneer when the costs due to the winner's bankruptcy are high enough. Depending on the cost of the ex-post verification, the average bid auction can be dominated by the first price with monitoring. I use a new dataset of Italian public procurement auctions, run alternately using a form of the average bid auction or the augmented first price, to structurally estimate the bids' verification cost, the firms' mark up and the inefficiency generated by the average bid auctions.

Keywords: auctions; public procurement; collusion; structural estimation (search for similar items in EconPapers)
JEL-codes: D44 D82 H57 L22 L74 (search for similar items in EconPapers)
Date: 2009-06
New Economics Papers: this item is included in nep-cta
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Citations: View citations in EconPapers (29)

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Related works:
Working Paper: When the Highest Bidder Loses the Auction: Theory and Evidence from Public Procurement (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_717_09

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