How Subsidies Affect Asymmetric Procurement Auctions: Comparing Experimental Results to Theory

41 Pages Posted: 26 Jan 2021 Last revised: 12 Mar 2021

See all articles by Sanghoon Cho

Sanghoon Cho

University of South Carolina - Darla Moore School of Business

Joel O. Wooten

University of South Carolina - Department of Management Science

Timothy Fry

University of South Carolina - Darla Moore School of Business

Joan M. Donohue

University of South Carolina - Darla Moore School of Business

Date Written: March 11, 2021

Abstract

The use of bid preference auctions, where one class of bidders is offered favored treatment over another class, has received mixed attention in the literature. Research has shown there is an economic benefit of such policies thanks to lower costs for procurement auction buyers as incentives are offered to disadvantaged sellers. In this paper, we study one type of preferential procurement auction: the subsidy. Using a set of controlled experiments, we compare actual bidder behavior to what is predicted in equilibrium. We find that sellers suffer from overly aggressive bidding (but do learn over time). More importantly, we explore the behaviors that may explain any deviations from theory – focusing on best response bidding and what directional learning theory would predict based on prior round outcomes. We find evidence of myopic behaviors among bidders. One intriguing take-away is that cost-advantaged bidders may be more responsive to opponents’ bids. Due to the wide use of bid preference auctions to support both policy and social aims, our findings have both financial and societal implications.

Keywords: subsidy, procurement auction, private value, behavioral experiment

Suggested Citation

Cho, Sanghoon and Wooten, Joel O. and Fry, Timothy and Donohue, Joan M., How Subsidies Affect Asymmetric Procurement Auctions: Comparing Experimental Results to Theory (March 11, 2021). Available at SSRN: https://ssrn.com/abstract=3680763 or http://dx.doi.org/10.2139/ssrn.3680763

Sanghoon Cho

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

Joel O. Wooten (Contact Author)

University of South Carolina - Department of Management Science ( email )

United States

Timothy Fry

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

Joan M. Donohue

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
64
Abstract Views
395
rank
467,612
PlumX Metrics