Investment Incentives in Procurement Auctions

Posted: 10 Oct 2003

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)

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This paper investigates firms' incentives to invest in cost reduction in the first price sealed bid auction, a format largely used for procurement. Two central features of the model are that we allow firms to be heterogeneous and that investment is observable. We find that firms will tend to underinvest in cost reduction because they anticipate fiercer head-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 and that this is socially inefficient. These results have implications for market design when investment is important.

Keywords: Asymmetric auctions, endogeneous distributions, investment incentives

JEL Classification: C72, D44, L13

Suggested Citation

Arozamena, Leandro and Cantillon, Estelle, Investment Incentives in Procurement Auctions. Available at SSRN:

Leandro Arozamena

Universidad Torcuato Di Tella - Departamento de Economia ( email )

Saenz Valiente 1010
Buenos Aires, C1428BIJ

CONICET ( email )

Buenos Aires, C1425FQB

Estelle Cantillon (Contact Author)

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

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

Centre for Economic Policy Research (CEPR)

United Kingdom

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