An experimental study of bidding behavior in procurement auctions with subcontract bids: Profits, efficiency, and policy implications

Naoki Watanabe, Jun Nakabayashi

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

In order to lower the estimates of the total project costs, prime contractors often solicit bids from subcontractors which can complete their works with lower costs than they do by themselves, prior to submitting their own bids in procurement auctions. This paper presents a simple model of such two-stage auctions and shows some observations in a laboratory experiment conducted to examine theoretical predictions. Our main observations are as follows. (1) Subcontractors bid more aggressively (i.e., they lower their bids) in the first-price subcontract auctions, as compared to the case where there is no second-stage competition among prime contractors. (2) Second-price subcontract auctions render higher profits to prime contractors than first-price auctions. (3) First-price subcontract auctions more likely achieve ex post efficient allocations of a subcontract work than second-price auctions. The policy implications are also discussed.

Original languageEnglish
Title of host publicationSICE 2011 - SICE Annual Conference 2011, Final Program and Abstracts
PublisherSociety of Instrument and Control Engineers (SICE)
Pages1202-1207
Number of pages6
ISBN (Print)9784907764395
Publication statusPublished - 2011 Jan 1
Externally publishedYes
Event50th Annual Conference on Society of Instrument and Control Engineers, SICE 2011 - Tokyo, Japan
Duration: 2011 Sep 132011 Sep 18

Publication series

NameProceedings of the SICE Annual Conference

Other

Other50th Annual Conference on Society of Instrument and Control Engineers, SICE 2011
CountryJapan
CityTokyo
Period11/9/1311/9/18

Keywords

  • experiment
  • procurement auction
  • subcontract bid

ASJC Scopus subject areas

  • Control and Systems Engineering
  • Computer Science Applications
  • Electrical and Electronic Engineering

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