American Economic Review: Vol. 104 No. 4 (April 2014)

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Bidding for Incomplete Contracts: An Empirical Analysis of Adaptation Costs

Article 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.104.4.1288

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.

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Additional Materials

Online Appendix (305.50 KB) | Download Data Set (12.16 MB) | Author Disclosure Statement(s) (42.20 KB)

Authors

Bajari, Patrick (U WA)
Houghton, Stephanie (U TX)
Tadelis, Steven (U CA, Berkeley and eBay Research Labs)

JEL Classifications

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


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