Procurement contracts are often renegotiated because of changes that are required after their execution. Using highway paving contracts we show that renegotiation imposes significant adaptation costs. Reduced form regressions suggest that bidders respond strategically to contractual incompleteness and that adaptation costs are an important determinant of their bids. A structural empirical model compares adaptation costs to bidder markups and shows that adaptation costs account for 8-14 percent of the winning bid. Markups from private information and market power, the focus of much of the auctions literature, are much smaller by comparison. Implications for government procurement are discussed.

Bid preferences in procurement auctions allow firms from an identifiable group an advantage in bidding against unfavored firms. While economic efficiency is expected to fall as a result of bid preferences, government procurement costs may either increase or decrease depending on the competitive response of favored and unfavored firms. This paper uses data from California auctions for road construction contracts, where small businesses receive a five percent bid preference in auctions for projects using only state funds and no preferential treatment on projects using federal aid. I show that while firms ’ bidding behavior matches theoretical predictions, procurement costs are 3.8 percent higher on auctions using preferences. The higher procurement cost in preference auctions is attributed to reduced participation by lower cost large firms. Structural estimates of latent firm costs are then used to evaluate how efficiency and the division of surplus between firms and the government are impacted by bid preferences. Firm profits are 3.1 percent lower under bid preferences, however this is overwhelmed by the efficiency loss due to reduced large firm participation. The efficiency loss conditional on firm participation is estimated to represent around 0.1 percent of overall procurement costs. Including the adverse

We argue that once we take into account the students ’ rational enrollment decisions, mismatch in the sense that the intended beneficiary of affirmative action admission policies are made worse off could occur only if selective universities possess private information about students’ post-enrollment treatment effects. This necessary condition for mismatch provides the basis for a new test. We propose an empirical methodology to test for private information in such a setting. The test is implemented using data from Campus Life and Learning Project (CLL) at Duke. Evidence shows that Duke does possess private information that is a statistically significant predictor of the students ’ post-enrollment academic performance. We also propose strategies to evaluate more conclusively whether the evidence of Duke private information has generated mismatch.

Since the pioneering work of Akerlof (1970), economists have been aware of the adverse selection problem that information asymmetries can create in used goods markets. The remarkable growth in online auctions of used goods, where buyers generally purchase sight unseen, therefore poses a puzzle. I argue that given a means for credible information disclosure, sellers will voluntarily disclose their private information to buyers through online media. This limits information asymmetries and adverse selection. To test this theory, I examine the role of information in a large online used car market, eBay Motors. I find that sellers selectively disclose information; that information asymmetries are reduced by these disclosures; and that online media such as photos, text and graphics provide a rich environment for information disclosure. ∗ This is a revised version of my job market paper. I would especially like to thank Pat Bajari for his support and advice on this paper. I am also grateful to Jim Levinsohn for his comments,

Usinganoveldatasetof386first-price municipal bond auctions held in California, I empirically explore the revenue ranking result of Milgrom and Weber (1982). I test for common values; the test strongly rejects the null hypothesis of pure private values. I then estimate a structural model with pre-sale and common values, the model in which the pre-sale price of the bond is a signal about its market value. Based on these estimates, I compute "counterfactual " revenues for the other auction formats and find that the second-price auction would deliver substantial revenue gains over the first-price auction, but the gains from the English over the second-price auction are smaller. Put differently, the revenue gains for the bond issuers from using the English auction could be substantial, but not because it would reduce the "winner’s curse".

Differences in cost efficiency and productivity across firms may introduce asymmetries in procurement auctions. Relying on a structural approach, this article investigates potential asymmetry among firms bidding for snow removal contracts in Montreal. The empirical results show that firms located in close proximity have a cost advantage relative to other firms in the most urbanised part of Montreal because of prohibitive equipment storage costs. The extent of inefficiency due to asymmetry is empirically assessed. Various policy experiments are performed. A bidding preference policy shows that the city could expect to reduce its costs for allocating snow removal contracts. When biddersÕ willingness to pay depends in part on observable variables, the principal’s interest is not best served by creating a level auction playing field. This article studies procurement auctions for snow removal contracts in Montreal. It investigates the degree to which companies in disadvantageous locations should win even if they do not submit the lowest bid. From the submitted bids, a novel empirical methodology estimates the extent of cost variation across firms along with its variation within location. Although the dispersion is substantial, the gain from treating bidders unequally is limited.

We empirically examine the impact of relationships between contractors and subcontractors on firm pricing and entry decisions in the California highway procurement market using data from auctions conducted by the California Department of Transportation. Relationships in this market are valuable if they mitigate potential hold-up problems and incentives for ex post renegotiation due to contractual incompleteness. An important characteristic of informal contracts are that they must be self-enforcing, so that the value of relationships between firms and suppliers depend on the extent of possibilities for future interaction. We construct measures of the stock of contractors ’ prior interactions with relevant subcontractors and find that a larger stock of relationships leads to lower bids and a greater likelihood of entry. Importantly, this relationship does not hold in periods of time and areas with little future contract volume, suggesting that the self-enforcement mechanism is crucial in providing value for informal contracts.

Abstract This article shows how reserve prices can be used to control for unobserved object heterogeneity to identify and estimate the distribution of bidder values in auctions. Reserve prices are assumed to be monotonic in the realization of unobserved heterogeneity, but not necessarily set optimally. The model is estimated using transaction prices from a used car auction platform to show that the platform enables sellers to capture a large fraction of the potential value from selling their vehicle. Individual sellers benefit mostly from access to a large set of buyers, but the magnitude depends on accounting for unobserved heterogeneity. JEL CODES: D44, L20, L62

In this paper, we consider nonparametric identification and estimation of first-price auction models when N ∗ , the number of potential bidders, is unknown to the researcher, but observed by bidders. Exploiting results from the recent econometric literature on models with misclassification error, we develop a nonparametric procedure for recovering the distribution of bids conditional on the unknown N ∗. Monte Carlo results illustrate that the procedure works well in practice. We present illustrative evidence from a dataset of procurement auctions, which shows that accounting for the unobservability of N ∗ can lead to economically meaningful differences in the estimates of bidders ’ profit margins.

We propose a novel methodology for nonparametric identification of first-price auction models with independent private values, which accommodates auction-specific unobserved heterogeneity and bidder asymmetries, based on recent results from the econometric literature on nonclassical measurement error in Hu and Schennach (2008). Unlike Krasnokutskaya (2009), we do not require that equilibrium bids scale with the unobserved heterogeneity. Our approach accommodates a wide variety of applications, including settings in which there is an unobserved reserve price, an unobserved cost of bidding, or an unobserved number of bidders, as well as those in which the econometrician fails to observe some factor with a non-multiplicative effect on bidder values. 1