NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Bidding for Incomplete Contracts: An Empirical Analysis

Patrick Bajari, Stephanie Houghton, Steve Tadelis

NBER Working Paper No. 12051
Issued in February 2006
NBER Program(s):   IO

Procurement contracts are often incomplete because the initial plans and specifications are changed and refined after the contract is awarded to the lowest bidder. This results in a final cost to the buyer that differs from the low bid, and may also involve significant adaptation and renegotiation costs. We propose a stylized model of bidding for incomplete contracts and apply it to data from highway paving contracts. Reduced form regressions suggest that bidders respond strategically to contractual incompleteness and that adaptation costs, broadly defined, are an important determinant of the observed bids. We then estimate the costs of adaptation and bidder markups using a structural auction model. The estimates suggest that adaptation costs on average account for about ten percent of the winning bid. The distortions from private information and local market power, which are the focus on much of the literature on optimal procurement mechanisms, are much smaller by comparison.

download in pdf format
   (716 K)

email paper

This paper is available as PDF (716 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12051

Users who downloaded this paper also downloaded these:
Bajari and Lewis w14855 Procurement Contracting with Time Incentives: Theory and Evidence
Bajari, McMillan, and Tadelis w9757 Auctions Versus Negotiations in Procurement: An Empirical Analysis
Athey and Haile w12126 Empirical Models of Auctions
Porter and Zona w4013 Detection of Bid Rigging in Procurement Auctions
Levin and Tadelis w13350 Contracting for Government Services: Theory and Evidence from U.S. Cities
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us