Bidding for Contracts under Uncertain Demand: Skewed Bidding and Risk Sharing

52 Pages Posted: 1 May 2019 Last revised: 24 Dec 2019

See all articles by Yao Luo

Yao Luo

University of Toronto - Department of Economics

Hidenori Takahashi

Osaka School of International Public Policy / Osaka University; affiliation not provided to SSRN

Date Written: December 23, 2019

Abstract

Procurement projects often involve substantial uncertainty in inputs at the time of contracting. Whether the procurer or contractor assumes such risk depends on the specific contractual agreement. Using auction data from the Florida Department of Transportation, we document evidence of i) risk-balancing behavior through the formation of bid portfolios, and ii) opportunistic behavior via skewed bidding. We develop and estimate a model of bidding for contracts where bidders have multidimensional private information. In equilibrium, bidders balance skewed bidding and risk exposure; both efficient and inefficient bidders bid aggressively via skewed bidding. Counterfactual experiments suggest that the onus of bearing project risk should fall on the procurer (contractor) when project risk is large (small).

Keywords: Contract, Unit-Price, Fixed-Price, Portfolio, Cost Overrun, Unobserved Heterogeneity, Procurement, Scoring Auction

JEL Classification: L5

Suggested Citation

Luo, Yao and Takahashi, Hidenori, Bidding for Contracts under Uncertain Demand: Skewed Bidding and Risk Sharing (December 23, 2019). Available at SSRN: https://ssrn.com/abstract=3364708 or http://dx.doi.org/10.2139/ssrn.3364708

Yao Luo

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S3G7
Canada

Hidenori Takahashi (Contact Author)

Osaka School of International Public Policy / Osaka University ( email )

1-31
Machikaneyama
Toyonaka, Osaka 560-0043
Japan
07048063028 (Phone)

HOME PAGE: http://https://sites.google.com/site/hidenoritakahashiutoronto/

affiliation not provided to SSRN

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