Empirical Studies on Contracts and Auctions
Saturday, Jan. 7, 2017 10:15 AM – 12:15 PM
Hyatt Regency Chicago, New Orleans
- Chair: Karam Kang, Carnegie Mellon University
Specific Investment and Contract Design: Evidence from Public Transportation
AbstractPublic 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
AbstractThis 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
AbstractReputational 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?
AbstractIn 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.
- C5 - Econometric Modeling
- D4 - Market Structure, Pricing, and Design