Bidding for Incomplete Contracts: An Empirical Analysis

41 Pages Posted: 5 May 2006 Last revised: 7 Dec 2022

See all articles by Patrick Bajari

Patrick Bajari

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Stephanie Houghton

Independent

Steven Tadelis

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: February 2006

Abstract

Procurement contracts are often incomplete because the initial plans and specifications are changed and refined after the contract is awarded to the lowest bidder. This results in a final cost to the buyer that differs from the low bid, and may also involve significant adaptation and renegotiation costs. We propose a stylized model of bidding for incomplete contracts and apply it to data from highway paving contracts. Reduced form regressions suggest that bidders respond strategically to contractual incompleteness and that adaptation costs, broadly defined, are an important determinant of the observed bids. We then estimate the costs of adaptation and bidder markups using a structural auction model. The estimates suggest that adaptation costs on average account for about ten percent of the winning bid. The distortions from private information and local market power, which are the focus on much of the literature on optimal procurement mechanisms, are much smaller by comparison.

Suggested Citation

Bajari, Patrick and Houghton, Stephanie and Tadelis, Steven, Bidding for Incomplete Contracts: An Empirical Analysis (February 2006). NBER Working Paper No. w12051, Available at SSRN: https://ssrn.com/abstract=885648

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University of Michigan at Ann Arbor - Department of Economics ( email )

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Stephanie Houghton

Independent

Steven Tadelis

University of California, Berkeley - Haas School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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