Procurements with Bidder Asymmetry in Cost and Risk-Aversion

45 Pages Posted: 11 Dec 2019 Last revised: 4 Aug 2020

See all articles by Gaurab Aryal

Gaurab Aryal

University of Virginia - Department of Economics

Hanna Charankevich

UVA Department of Economics

Seungwon (Eugene) Jeong

University of Bristol

Dong-Hyuk Kim

School of Economics, University of Queensland

Date Written: December 10, 2019

Abstract

We study asymmetric first-price procurements with unobserved heterogeneity and asymmetric risk-aversion. For this model, we propose a new empirical method that allows us to predict the expected procurement cost at any reserve price. Being able to perform such detailed counterfactual analysis is necessary to determine the cost-minimizing reserve prices and measure the associated inefficiencies. Using new data from public procurements in Russia for four different kinds of jobs, we find no unobserved heterogeneity, but find bidder-asymmetry in both costs and risk-aversion that vary across the jobs. We find that bidders are highly risk-averse and choosing non-binding reserve prices would minimize procurement costs, whereas assuming risk neutrality would have generated larger costs and lower efficiency. Assuming identical risk-aversion would also mislead policy analysis.

Keywords: Asymmetric first-price procurements, Asymmetric risk-aversion, Identification and estimation, Statistical Decision thoery, Unobserved heterogeneity.

JEL Classification: C11, C44, D22, D44, L00

Suggested Citation

Aryal, Gaurab and Charankevich, Hanna and Jeong, Seungwon (Eugene) and Kim, Dong-Hyuk, Procurements with Bidder Asymmetry in Cost and Risk-Aversion (December 10, 2019). Available at SSRN: https://ssrn.com/abstract=3500268 or http://dx.doi.org/10.2139/ssrn.3500268

Gaurab Aryal (Contact Author)

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

Hanna Charankevich

UVA Department of Economics ( email )

237 Monroe Hall
P.O. Box 400182
Charlottesville, VA 22904-418
United States

Seungwon (Eugene) Jeong

University of Bristol ( email )

The Priory Road Complex
Bristol, BS8 1TU
United Kingdom

HOME PAGE: http://eugenejeong.com

Dong-Hyuk Kim

School of Economics, University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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