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Identification and Estimation in Highway Procurement Auctions under Unobserved Auction Heterogeneity

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  • Elena Krasnokutskaya

    (Department of Economics, University of Pennsylvania)

Abstract

This paper proposes a semi-parametric method to uncover the distribution of bidders’ private information in the market for highway procurement when unobserved auction heterogeneity is present. I derive sufficient conditions under which the model is identified and show that the estimation procedure produces uniformly consistent estimators of the distributions in question. The estimation procedure is applied to data from Michigan highway procurement auctions. I estimate that 75% of the variation in bidders’ costs may be attributed to the factors known to all bidders and only 25% may be generated by private information. My results suggest that failing to account for unobserved auction heterogeneity may lead to overestimating uncertainty that bidders face when submitting their bids. As a result both inefficiency of the auction mechanism and mark-ups over the bidders’ costs may be overestimated.

Suggested Citation

  • Elena Krasnokutskaya, 2004. "Identification and Estimation in Highway Procurement Auctions under Unobserved Auction Heterogeneity," PIER Working Paper Archive 05-006, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:05-006
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    References listed on IDEAS

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    Cited by:

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    2. Gregory Lewis & Patrick Bajari, 2011. "Procurement Contracting With Time Incentives: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(3), pages 1173-1211.
    3. Lamy, Laurent, 2012. "The econometrics of auctions with asymmetric anonymous bidders," Journal of Econometrics, Elsevier, vol. 167(1), pages 113-132.
    4. William Horrace & Christopher Parmeter, 2011. "Semiparametric deconvolution with unknown error variance," Journal of Productivity Analysis, Springer, vol. 35(2), pages 129-141, April.
    5. Yarmukhamedov, Sherzod & Smith, Andrew S.J. & Thiebaud, Jean-Christophe, 2020. "Competitive tendering, ownership and cost efficiency in road maintenance services in Sweden: A panel data analysis," Transportation Research Part A: Policy and Practice, Elsevier, vol. 136(C), pages 194-204.
    6. Patrick Bajari & Stephanie Houghton & Steve Tadelis, 2006. "Bidding for Incomplete Contracts: An Empirical Analysis," NBER Working Papers 12051, National Bureau of Economic Research, Inc.
    7. De Silva, Dakshina G. & Kosmopoulou, Georgia & Lamarche, Carlos, 2009. "The effect of information on the bidding and survival of entrants in procurement auctions," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 56-72, February.
    8. Pallavi Pal, 2023. "Sponsored Search Auction and the Revenue- Maximizing Number of Ads per Page," CESifo Working Paper Series 10299, CESifo.
    9. Pesendorfer, Martin & Cantillon, Estelle, 2007. "Combination Bidding in Multi-Unit Auctions," CEPR Discussion Papers 6083, C.E.P.R. Discussion Papers.
    10. Tong Li, 2009. "Book Review," Econometric Reviews, Taylor & Francis Journals, vol. 28(4), pages 388-392.
    11. Jeremy T. Fox & Patrick Bajari, 2013. "Measuring the Efficiency of an FCC Spectrum Auction," American Economic Journal: Microeconomics, American Economic Association, vol. 5(1), pages 100-146, February.
    12. Katzman, Brett & Reif, Julian & Schwartz, Jesse A., 2010. "The relation between variance and information rent in auctions," International Journal of Industrial Organization, Elsevier, vol. 28(2), pages 127-130, March.
    13. Henderson, Daniel J. & List, John A. & Millimet, Daniel L. & Parmeter, Christopher F. & Price, Michael K., 2008. "Imposing Monotonicity Nonparametrically in First-Price Auctions," MPRA Paper 8769, University Library of Munich, Germany.
    14. Francesco Decarolis, 2009. "When the highest bidder loses the auction: theory and evidence from public procurement," Temi di discussione (Economic working papers) 717, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    First-Price Auctions; unobserved auction heterogeneity; highway procurement;
    All these keywords.

    JEL classification:

    • L0 - Industrial Organization - - General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L8 - Industrial Organization - - Industry Studies: Services
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

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