Empirical Studies on Contracts and Auctions

Paper Session

Saturday, Jan. 7, 2017 10:15 AM – 12:15 PM

Hyatt Regency Chicago, New Orleans
Hosted By: Korea-America Economic Association
  • Chair: Karam Kang, Carnegie Mellon University

Multiproduct Nonlinear Pricing: Mobile Voice Service and SMS

Yao Luo
,
University of Toronto
Isabelle Perrigne
,
Rice University
Quang Vuong
,
New York University

Abstract

This paper studies multiproduct nonlinear pricing in the cellular phone industry with voice and message services. The model builds on Armstrong (1996) with multidimensional screening leading to a cost-based tariff. We introduce unobserved product heterogeneity to capture extra features of consumption. We then study the identification of the model primitives. Assuming homogeneity of the cost function, we show that the cost function is identified. Using the equilibrium mappings from the model establishes the identification of the aggregate type density and the indirect utility from observables. We then develop a nonparametric estimation procedure. The empirical results support the model and display an important heterogeneity in types and unobserved heterogeneity. Counterfactuals assess the gain/loss of alternative pricing strategies.

Specific Investment and Contract Design: Evidence from Public Transportation

Guillermo Diaz
,
Pontifical Catholic University of Peru
Kei Kawai
,
University of California-Berkeley
Andre Trindade
,
Getulio Vargas Foundation

Abstract

Public entities often grant concession rights to private firms for the provision of public services. The design of these contracts has important implications for cost efficiency. A longer contract will give more incentives to the private firm to cut costs. However, it will reduce the possibility of replacing the firm with a more efficient one. In this paper, we analyze empirically this type of contracts. We start by constructing a structural model for typical concession contractual arrangements between a principal and an agent. We then show how to identify and estimate this model using data from French public transportation contracts. After recovering the model primitives, our counterfactual experiments compute welfare under different scenarios: (i) first best; (ii) under a limit set of contract types; (iii) using relational incentive contracts (Levin 2003).

Sequential Auctions with Synergy and Affiliation

Yunmi Kong
,
Rice University

Abstract

This paper studies sequential auctions with synergy in which each bidder’s values can be affiliated across auctions, and empirically assesses the revenue effects of bundling. Ignoring affiliation can lead to falsely detecting synergy where none exists. Motivated by data on synergistic pairs of oil and gas lease auctions, where the same winner often wins both tracts, I model a sequence in which a first-price auction is followed by an English auction. At the first auction, bidders know their first value and the distribution of their second value conditional on the first value. At the second auction, bidders learn their second value, which is affiliated with their first value and also affected by potential synergy if they won the first auction. Both synergy and affiliation take general functional forms. I establish nonparametric identification of the joint distribution of values, synergy function, and risk aversion parameter from observed bids in the two auctions. Intuitively, the effect of synergy is isolated by comparing the second-auction behavior of a first-auction winner and first-auction loser who bid the same amount in the first auction. Using the identification results, I develop a nonparametric estimation procedure for the model, assess its finite sample properties using Monte Carlo simulations, and apply it to the oil and gas lease data. I find both synergy and affiliation between adjacent tracts, though affiliation is primarily responsible for the observed allocation patterns. Bidders are risk averse. Counterfactual simulations reveal that bundled auctions would yield higher revenue, with a small loss to allocative efficiency.

Past Performance and Procurement Outcomes

Francesco Decarolis
,
Boston University and Einaudi Institute for Economics and Finance
Riccardo Pacini
,
Agenzia Demanio
Giancarlo Spagnolo
,
Stockholm School of Economics

Abstract

Reputational incentives are a powerful mechanism to improve suppliers' performance, so strong to possibly start to influence suppliers’ behavior even before they are put in place. This paper presents a field experiment carried through by a public multi-utility company that provides empirical evidence on the effect of announcing the use of past performance to award forthcoming contracts. We find that suppliers react by rapidly improving their performance and that the improvement is symmetric across them: the compliance on the different quality and safety parameters scored improves from 30 percent to more than 80 percent. Suppliers strategically improve their performance more on the parameters with a greater weight in the score computation. Interestingly, no price increase is associated with the improved performance, neither at the time of the auction nor afterwards during renegotiations. This experiment hence suggests that the gains from avoiding suppliers’ moral hazard when executing the contract may be higher than those from enforcing competition always and everywhere.

Winning by Default: Why is there So Little Competition in the Government Procurement?

Karam Kang
,
Carnegie Mellon University
Robert A. Miller
,
Carnegie Mellon University

Abstract

In government procurement auctions, eligibility requirements are often imposed and, perhaps not surprisingly, contracts generally have a small number of participating bidders. To understand the effects of the restrictions of competition on the total cost of government procurement, we develop, identify, and estimate a principal-agent model in which the government selects a contractor to undertake a project. We consider three reasons why restricting entry could be beneficial to the government: by decreasing bid processing and solicitation costs, by increasing the chance of selecting a favored contractor and consequently reaping benefits from the favored contractor, and by excluding ex-ante less efficient contracts, which may intensify competition in terms of bid behavior. Using our estimates, we quantify the effects of the eligibility restrictions on the total cost of procurement.
JEL Classifications
  • C5 - Econometric Modeling
  • D4 - Market Structure, Pricing, and Design