Procurements with Bidder Asymmetry in Cost and Risk-Aversion

Posted: 11 Dec 2019 Last revised: 24 Jul 2022

See all articles by Gaurab Aryal

Gaurab Aryal

Washington University in St. Louis

Hanna Charankevich

Biocomplexity Institute, University of Virginia

Seungwon (Eugene) Jeong

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Dong-Hyuk Kim

School of Economics, University of Queensland

Multiple version iconThere are 2 versions of this paper

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)

Washington University in St. Louis ( email )

Seigle Hall 335
One Brookings Drive
St. Louis, MO 63130
United States

Hanna Charankevich

Biocomplexity Institute, University of Virginia ( email )

1100 Wilson Blvd
Floor 29
Arlington, VA 22209
United States

Seungwon (Eugene) Jeong

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Daejeon, 34141
Korea, Republic of (South Korea)

Dong-Hyuk Kim

School of Economics, University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
925
PlumX Metrics