Procurements with Bidder Asymmetry in Cost and Risk-Aversion
45 Pages Posted: 11 Dec 2019 Last revised: 4 Aug 2020
Date Written: December 10, 2019
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: Suggested Citation