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.

Equilibria in Asymmetric Auctions with Entry

Regarding optimal design in the private value environment, there is an unsolved discrepancy in the literature regarding asymmetric auctions and auctions with endogenous participation; Literature on the former suggests that well-designed distortive mechanisms are optimal (revenue maximizing) assuming the bidding costs are negligible, while that on the latter insists that the mechanisms with free entry and no distortion are optimal provided that the potential bidders are ex ante symmetric.This paper is the first attempt to reconcile the two views by establishing a model for asymmetric auctions with costly participation. The main findings are threefold; First, an optimal outcome is possible if and only if the mechanism is ex post efficient. Second, without any participation control, a coordination problem is likely in which only the weak bidders participate and the strong bidders stay out. Finally, there is an entry fee/subsidization scheme which, together with an ex post efficient mechanism, induces the optimal outcome as a unique equilibrium.

Procurement Auctions with Pre-award Subcontracting

To be the lowest bidder in procurement auctions, prime contractors commonly solicit subcontract bids at the bid preparation stage. A remarkable feature of the subcontract competition is that "winning is not everything"; the lowest subcontractor gets a job conditional on his prime contractor's successful bid. This paper makes the first attempt to establish a model for such pre-award subcontract competitions included in procurement auctions. I find that subcontractors strategically provide larger discounts on their bids in response to increasing competition among prime contractors. I thus clarify that the behavior results in an endogenous downward shift in the distribution of bidders' private information in the downstream auction as the number of rivals increases, or the reservation price drops. The result has a striking impact on the analysis of optimal reservation price and empirical identification of the bidder's cost distribution in procurement auctions.

Lost in Transaction: Individual-Level Welfare Loss in Quickly-Circulating Durable Goods Markets with Planned Temporary Ownership

A new style of durable goods consumption through a large scale online redistribution marketplace (e.g. eBay and Yahoo! Auction), characterized by a relatively small degree of usage and a short-term ownership, is becoming increasingly popular these days. Yet, the welfare structures of such emerging markets have not been investigated. By using a unique dataset of quickly-circulating multi-use train ticket resale markets, and by investigating perfectly-substitutable goods, this short article models, estimates, and analyzes individual-level welfare loss in such rapidly-growing market sectors. Our analysis shows that individual-level welfare losses caused by search and resale costs are non-negligibly large, ranging from 3% to 15% of the new good price. We also find that such individual-level welfare losses, which could be considered as hidden charges, are largely heterogeneous across buyers with differing degrees of intended use. These losses are described as disadvantageous to users who demand light degrees of usage

An Experimental Study of Bidding Behavior in Subcontract Auctions

It is commonly observed in practices that prime contractors solicit subcontract bids, prior to submitting their bids in procurement auctions: the auctioneers in subcontract auctions will become bidders in a procurement auction. This point is remarkably different from the standard theory of procurement auction. We presented a simple model of such subcontract auctions and conducted a laboratory experiment to examine the bidding behavior derived theoretically. We observed that in the subcontract auction, (1) subjects bid following the equilibrium bidding function derived theoretically, (2) the revenue equivalence between first-price and second-price mechanisms breaks down, and (3) the first-price mechanism more likely achieves ex post efficient allocations than the second-price mechanism.

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

As part of public procurement, many governments adopt small business programs to provide contract opportunities for businesses often with preferences for firms operated by members 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.procurement auctions, small business set-asides, structural estimation of auctions

Data-driven regulation: theory and application to missing bids

We document a novel bidding pattern observed in procurement auctions from Japan: winning bids tend to be isolated. There is a missing mass of close losing bids. This pattern is suspicious in the following sense: it is inconsistent with competitive behavior under arbitrary information structures. Building on this observation, we develop a theory of data-driven regulation based on “safe tests,” i.e. tests that are passed with probability one by competitive bidders, but need not be passed by non-competitive ones. We provide a general class of safe tests exploiting weak equilibrium conditions, and show that such tests reduce the set of equilibrium strategies that cartels can use to sustain collusion. We provide an empirical exploration of various safe tests in our data, as well as discuss collusive rationales for missing bids.First author draf

The value of privacy in cartels: an analysis of the inner workings of a bidding ring

We study the inner workings of a bidding cartel focusing on the way in which bidders communicate with one another regarding how each bidder should bid. We show that the designated winner of the cartel can attain higher payoffs by randomizing its bid and keeping it secret from other bidders when defection is a concern. Intuitively, randomization makes defection less attractive as potential defectors face the risk of not winning the auction even if they deviate. We illustrate how our theoretical predictions are borne out in practice by studying a bidding cartel that operated in the town of Kumatori, Japan.First author draf