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STRATEGIC BIDDING AND CONTRACT RENEGOTIATION
Author(s) -
Jung Hojin,
Kosmopoulou Georgia,
Lamarche Carlos,
Sicotte Richard
Publication year - 2019
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12368
Subject(s) - bidding , procurement , microeconomics , incentive , business , industrial organization , common value auction , agency (philosophy) , set (abstract data type) , collusion , economics , ex ante , marketing , computer science , philosophy , epistemology , programming language , macroeconomics
When firms bid in procurement auctions, they take into account the likelihood of future contract renegotiations. If they anticipate that certain input quantities will change ex post, they have an incentive to strategically skew their itemized bids, thereby increasing profits for themselves and costs for the procuring agency. We develop and estimate a structural model of strategic bidding using a data set of road construction projects in Vermont. We find that bidding strategies lead to increased markups for renegotiated items and reduced markups for nonrenegotiated items, results consistent with bid‐skewing.