Persistent markups in bidding markets with financial constraints

Pablo Beker and Angel Hernando-Veciana ()

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: This paper studies the impact of financial constraints on the persistency of high markups in a class of markets, including public procurement, known by practitioners as bidding markets. We develop an infinite horizon model in which two firms optimally reinvest working capital and bid for a procurement contract each period. Working capital is constrained by the firm's cash from previous period and some exogenous cash flow, it is costly and it increases the set of acceptable bids. We argue that the latter is a natural consequence of the presence of progress payments or the existence of moral hazard. We say that the firm is (severely) financially constrained if its working capital is such that only bids (substantially) above production cost are acceptable. We show that markups are positive (high) if and only if one firm is (severely) financially constrained. Our main result is that markups are persistently high because one firm is severely financially constrained most of the time.

Keywords: Bidding; markets; Financial; constraints; Markups (search for similar items in EconPapers)
JEL-codes: D43 D44 L13 (search for similar items in EconPapers)
Date: 2011-10-26
New Economics Papers: this item is included in nep-ind
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:we1133

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