Bid Costs and the (In)efficiency of Public Procurement Auctions

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Abstract

The paper analyzes the excess entry hypothesis for sealed-bid first-price public procurement auctions. The hypothesis is proved analytically for any feasible combination of bid preparation cost and bid evaluation cost when the bidders face a rectangular cost density function and confirmed in numerical simulations based on a family of flexible cost density functions. The excess entry hypothesis implies that the procurer may reduce both his own cost and the social cost by imposing a positive fee on the bids. Sequential search is a superior strategy to a public procurement auction whether or not the procurer imposes an optimal fee on the bids.
Original languageEnglish
Place of PublicationFrederiksberg
PublisherCopenhagen Business School [wp]
Number of pages22
Publication statusPublished - 5 Feb 2019
SeriesWorking Paper / Department of Economics. Copenhagen Business School
Number1-2019

Keywords

  • Excess entry
  • Public procurement auctions
  • Optimal fee
  • Sequential search

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