Winner's Curse Corrections Magnify Adverse Selection

The adverse-selection literature has only considered the case in which competing sellers' costs of supply are independent and privately known by the individual sellers. In contrast, the auction literature has ignored adverse selection by implicitly assuming that a bid-taker is indifferent between suppliers at a given price. We show that competition in auctions with common-value elements serves to magnify the impact of adverse selection, as a bidder supplying a higher-cost product rationally makes a heightened winner's curse correction in a procurement auction. Hence lower-cost suppliers are disproportionately likely to win the auction, potentially creating a more serious quality problem for the procurer than mainstream adverse-selection models suggest.winner's curse; adverse selection; common-value auctions; procurement; product quality

Project management decisions with uncertain targets

Project management decisions with uncertain target

Winner's Curse Corrections Magnify Adverse Selection

The adverse-selection literature has only considered the case in which competing sellers' costs of supply are independent and privately known by the individual sellers. In contrast, the auction literature has ignored adverse selection by implicitly assuming that a bid-taker is indifferent between suppliers at a given price. We show that competition in auctions with common-value elements serves to magnify the impact of adverse selection, as a bidder supplying a higher-cost product rationally makes a heightened winner's curse correction in a procurement auction. Hence lower-cost suppliers are disproportionately likely to win the auction, potentially creating a more serious quality problem for the procurer than mainstream adverse-selection models suggest

Managing Systems Engineering Projects with Uncertain Requirements

Prior to being alerted that a requirement has changed, project management typically recommends that an engineer treat that requirement as fixed. But proper risk management emphasizes that all uncertainties should be explicitly recognized prior to making any decisions. Hence the engineer should explicitly recognize the possibility that their requirements may change. As a result, systems engineering indexes each requirement by its stability, which reflects its probability of changing. Building on this insight, this paper presents a new technique for considering the uncertainty associated with any requirement in design decisions.Peer Reviewedhttps://deepblue.lib.umich.edu/bitstream/2027.42/151910/1/iis2610.pd