When the Highest Bidder Loses the Auction

82 Pages Posted: 17 Dec 2009 Last revised: 27 Oct 2019

See all articles by Francesco Decarolis

Francesco Decarolis

Bocconi University - Department of Economics

Date Written: June 10, 2009

Abstract

In this paper I study two methods often used in public procurement to deal with the risk that the winning bidder may default on his bid: augmenting the standard first price auction with an ex-post verification of the responsiveness of the bids and using an average bid auction. I show that when penalties for defaulting are asymmetric across bidders and when their valuations are characterized by a predominant common component, the average bid auction is preferred over the standard first price by an auctioneer when the costs due to the winner's bankruptcy are high enough. Depending on the cost of the ex-post verification, the average bid auction can be dominated by the first price with monitoring. I use a new dataset of Italian public procurement auctions, run alternately using a form of the average bid auction or the augmented first price, to structurally estimate the bids' verification cost, the firms' mark up and the inefficiency generated by the average bid auctions.

Keywords: auctions, public procurement, collusion, structural estimation

JEL Classification: L22, L74, D44, D82, H57

Suggested Citation

Decarolis, Francesco, When the Highest Bidder Loses the Auction (June 10, 2009). Bank of Italy Temi di Discussione (Working Paper) No. 717, Available at SSRN: https://ssrn.com/abstract=1523216 or http://dx.doi.org/10.2139/ssrn.1523216

Francesco Decarolis (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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