American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Bidding for Incomplete Contracts: An Empirical Analysis of Adaptation Costs
American Economic Review
vol. 104,
no. 4, April 2014
(pp. 1288–1319)
Abstract
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 7.5-14 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.Citation
Bajari, Patrick, Stephanie Houghton, and Steven Tadelis. 2014. "Bidding for Incomplete Contracts: An Empirical Analysis of Adaptation Costs." American Economic Review, 104 (4): 1288–1319. DOI: 10.1257/aer.104.4.1288Additional Materials
JEL Classification
- D44 Auctions
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory
- H57 National Government Expenditures and Related Policies: Procurement
- L13 Oligopoly and Other Imperfect Markets
- L74 Construction
- R42 Transportation Economics: Government and Private Investment Analysis; Road Maintenance, Transportation Planning