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Bidding for Contracts under Uncertain Demand: Skewed Bidding and Risk Sharing

Yao Luo and Hidenori Takahashi

Working Papers from University of Toronto, Department of Economics

Abstract: Procurement projects often involve substantial uncertainty in inputs at the time of contracting. Whether the procurer or contractor assumes such risk depends on the specific contractual agreement. We develop a model of auction contracts where bidders have multidimensional private information. Bidders balance skewed bidding and risk exposure; both efficient and inefficient bidders submit a low bid via skewed bidding. We document evidence of i) risk-balancing behavior through bid portfolio formation and ii) opportunistic behavior via skewed bidding using auction data. Counterfactual experiments suggest the onus of bearing project risk should fall on the procurer (contractor) when project risk is large (small).

Keywords: Contract; Unit-Price; Fixed-Price; Portfolio; Cost Overrun; Procurement; Scoring Auction (search for similar items in EconPapers)
JEL-codes: L5 (search for similar items in EconPapers)
Pages: Unknown pages
Date: 2022-09-01
New Economics Papers: this item is included in nep-agr, nep-com, nep-cta, nep-des, nep-exp, nep-ppm and nep-rmg
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