Increasing Competition and the Winner's Curse: Evidence from Procurement

Creators: Hong, Han; Shum, Matthew

Abstract

We assess empirically the effects of the winner's curse which, in common-value auctions, counsels more conservative bidding as the number of competitors increases. First, we construct an econometric model of an auction in which bidders' preferences have both common- and private-value components, and propose a new monotone quantile approach which facilitates estimation of this model. Second, we estimate the model using bids from procurement auctions held by the State of New Jersey. For a large subset of these auctions, we find that median procurement costs rise as competition intensifies. In this setting, then, asymmetric information overturns the common economic wisdom that more competition is always desirable.

Additional Information

© 2002 The Review of Economic Studies Limited. First version received February 2000; final version accepted December 2001 (Eds.). The authors thank Marty Miller at the NJDOT for providing us with the data, and patiently answering our questions. We thank Jason Cummins, Mike Peters, David Sappington and Aloysius Siow as well as seminar participants at Carnegie-Mellon, the Einaudi Foundation (Rome), Florida, Johns Hopkins, Harvard, NYU, Queen's, Rochester, Stanford, UCL, Yale, and the 1999 NASM (Madison, Wisconsin) for comments. Hai Che provided research assistance. We gratefully acknowledge financial assistance from the National Science Foundations (Hong: SES 0079495; Shum: SES 0003352) and from SSHRC. We thank the associate editor and two referees for extensive comments.

Attached Files

Published - HONres03.pdf

Files

HONres03.pdf

Files (236.3 kB)

Name	Size	Download all
HONres03.pdf md5:9d25fdb93dc808cbef6d6594ee1a59a9	236.3 kB	Preview Download

Additional details

	All versions	This version
Views	0	0
Downloads	0	0
Data volume	0 Bytes	0 Bytes