Information Disclosure in Open Non-Binding Procurement Auctions: an Empirical Study

The outcome of non-binding reverse auctions critically depends on how information is distributed during the bidding process. We use data from a large European procurement platform to study the impact of different information structures, specifically the availability of quality information to the bidders, on buyers' welfare and turnover of the platform. First we show that on the procurement platform considered bidders indeed are aware of their rivals' characteristics and the buyers preferences over those non-price characteristics. In a counterfactual analysis we then analyze the reduction of non-price information available to the bidders. As we find, platform turnovers in the period considered would decrease by around 30%, and the buyers' welfare would increase by the monetary equivalent of around 45% of turnover of the platform

Levelling the Field through Scoring Auctions

This paper considers how price auctions compare with two-dimensional bidding on price and quality, when bidders have comparative advantages. Two-dimensional bids are evaluated by a scoring rule decided by the auctioneer and three auction types are evaluated: a) a scoring auction reflecting the auctioneer's true preferences; b) a scoring auction with 'optimal' distortion of quality in the scoring rule; and c) a price-only auction with optimal quality threshold. The main findings are: 1) while the auctioneer always prefers the scoring auction, bidders may favour the price auction to the scoring auction and vice versa, depending on underlying conditions of the type space and cost parameters; and 2) the auctioneer can exploit firms' comparative advantages to level the field. An optimal scoring auction can, in some circumstances, extract all rent from bidders, leaving the auctioneer with all the e¢ ciency gain from the bidding process. There even exists a knife-edge situation where the auctioneer can extract all rent when using his true preferences as the scoring rule.scoring auctions; private values; comparative advantages.

Procurement Contracting with Time Incentives: Theory and Evidence

In public sector procurement, social welfare often depends on the time taken to complete the contract. A leading example is highway construction, where slow completion times inflict a negative externality on commuters. Recently, highway departments have introduced innovative contracting methods based on scoring auctions that give contractors explicit time incentives. We characterize equilibrium bidding and efficient design of these contracts. We then gather an extensive data set of highway repair projects awarded by the California Department of Transportation between 2003 and 2008 that includes both innovative and standard contracts. Comparing similar con- tracts in which the innovative design was and was not used, we show that the welfare gains to commuters from quicker completion substantially exceeded the increase in the winning bid. Having argued that the current policy is effective, we then develop a structural econometric model that endogenizes participation and bidding to examine counterfactual policies. Our estimates suggest that while the current policy raised com- muter surplus relative to the contractor's costs by $359M (6.8$1.52B (29%).

Increasing Competition and the Winner's Curse: Evidence from Procurement

We assess empirically the effects of the winner's curse which, in common-value auctions, counsels more conservative bidding as the number of competitors increases. First, we construct an econometric model of an auction in which bidders' preferences have both common- and private-value components, and propose a new monotone quantile approach which facilitates estimation of this model. Second, we estimate the model using bids from procurement auctions held by the State of New Jersey. For a large subset of these auctions, we find that median procurement costs rise as competition intensifies. In this setting, then, asymmetric information overturns the common economic wisdom that more competition is always desirable

Corruption in Procurement Auctions

We review different kinds of corruption that have been observed in procurement auctions and categorize them. We discuss means to avoid corruption, by choice of preferable auction formats, or with the help of technological tools, such as secure electronic bidding systems. Auctions that involve some soft elements, such as complex bids consisting of technical and financial proposals, are particularly prone to corruption. We do not believe that it is possible to eradicate corruption altogether in such situations, but we discuss means to make it less likely.

Small Business Set-asides in Procurement Auctions: An Empirical Analysis

As part of public procurement, many governments adopt small business programs to pro- vide contract opportunities for businesses often with preferences for firms operated by mem- bers of groups designated as disadvantaged. The redistribution arising from such programs, however, can introduce significant added costs to government procurement budgets. In this paper, the extent to which small business set-asides increase government procurement costs is examined. The estimates employ data on Japanese public construction projects, where approximately half of the procurement budget is set aside for small and medium enterprises (SMEs). Applying a positive relationship between profitability and firm size obtained by the non-parametric estimation of asymmetric first-price auctions with affiliated private values, a counterfactual simulation is undertaken to demonstrate that approximately 40 percent of SMEs would exit the procurement market if set-asides were to be removed. Surprisingly, the resulting lack of competition would increase government procurement costs more than it would offset the production cost inefficiency.

Joint Bidding in Common Value Auctions: Theory and Evidence

We examine theoretically and experimentally two countervailing effects of collusion and symmetric mergers among bidders. On one hand, the pooling of information within bidding rings increases the precision of competing estimates. We demonstrate that, in average value auctions, this leads to more aggressive bidding. On the other hand, since collusion decreases the number of active bidders, competition is lessened, reducing the price paid at auction. We demonstrate that the reduction in competition dominates the informational effects, resulting in lower prices. We examine these hypothesized e®ects experimentally by conducting a series of auctions with constant informational content but a varying number of bidders among whom this information is distributed. The experimental results are consistent with our theoretical predictions for different value and auction mechanism specifications.common value auctions, mergers, collusion, information

Two Stage Procurement Processes With Competitive Suppliers and Uncertain Supplier Quality

This paper considers a sourcing problem faced by a manufacturer who outsources the manufacturing of a product to one of several competing suppliers, whose cost and quality capabilities are unknown. We consider a two-stage sourcing process in which the first stage is the qualification stage, while the second stage is the supplier selection stage. In the first stage, the manufacturer exerts effort to learn about the quality level of each of the suppliers and then must determine the set of qualified suppliers, subject to some tolerance for error. In the second stage, the manufacturer runs a price-only procurement auction, in which the qualified suppliers compete for the manufacturer’s business.We model this two-stage sourcing process with the goal of obtaining insights into manufacturer’s optimal decisions. We seek to determine the optimal qualification standard, the optimal amount of effort to be exerted in the qualification process and the appropriate tolerance for error in the qualification process, and to understand the interactions between these decision variables. We are particularly interested in understanding how the manufacturer can design the process to 1) ensure the firm only sources from qualified suppliers and 2) encourage competition among the suppliers during supplier selection