Investment Incentives in Procurement Auctions

41 Pages Posted: 8 Apr 2001

See all articles by Leandro Arozamena

Leandro Arozamena

Universidad Torcuato Di Tella - Departamento de Economia; CONICET

Estelle Cantillon

Free University of Brussels (VUB/ULB) - ECARES; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2000

Abstract

We investigate firms' incentives for cost reduction in the first price sealed bid auction, a format largely used for procurement. A central feature of the model is that we allow firms to be heterogeneous. Though private value first price auctions are not games with monotonic best responses, we find that for comparative statics purposes they behave like these games. In particular, firms will tend to underinvest in cost reduction because they anticpate fiercer ehad-on competition. Using the second price auction as a benchmark, we also find that the first price auction will elicit less investment from market participants. Moreover, both auction formats tend to favor investment by the current market leader and are therefore likely to reinforce asymmetries among market participants.

Keywords: Asymmetric auctions, endogenous distributions, investment incentives

JEL Classification: C72, D44, L13

Suggested Citation

Arozamena, Leandro and Cantillon, Estelle, Investment Incentives in Procurement Auctions (August 2000). Available at SSRN: https://ssrn.com/abstract=264535 or http://dx.doi.org/10.2139/ssrn.264535

Leandro Arozamena

Universidad Torcuato Di Tella - Departamento de Economia ( email )

Saenz Valiente 1010
Buenos Aires, C1428BIJ
Argentina

CONICET ( email )

Buenos Aires, C1425FQB
Argentina

Estelle Cantillon (Contact Author)

Free University of Brussels (VUB/ULB) - ECARES ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
B-1050 Brussels
Belgium
+32 2 650 3840 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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