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Bidding for Incomplete Contracts: An Empirical Analysis

Patrick Bajari, Stephanie Houghton and Steven Tadelis

No 12051, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Procurement contracts are often incomplete because the initial plans and specifications are changed and refined after the contract is awarded to the lowest bidder. This results in a final cost to the buyer that differs from the low bid, and may also involve significant adaptation and renegotiation costs. We propose a stylized model of bidding for incomplete contracts and apply it to data from highway paving contracts. Reduced form regressions suggest that bidders respond strategically to contractual incompleteness and that adaptation costs, broadly defined, are an important determinant of the observed bids. We then estimate the costs of adaptation and bidder markups using a structural auction model. The estimates suggest that adaptation costs on average account for about ten percent of the winning bid. The distortions from private information and local market power, which are the focus on much of the literature on optimal procurement mechanisms, are much smaller by comparison.

JEL-codes: D23 D82 H57 L14 L22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic and nep-pbe
Date: 2006-02
Note: IO
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