TY  - JOUR
AU  - Bajari,Patrick
AU  - Houghton,Stephanie
AU  - Tadelis,Steve
TI  - Bidding for Incomplete Contracts: An Empirical Analysis
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12051
PY  - 2006
Y2  - February 2006
UR  - http://www.nber.org/papers/w12051
L1  - http://www.nber.org/papers/w12051.pdf
N1  - Author contact info:
Patrick Bajari
University of Washington
331 Savery Hall
UW Economics Box 353330
Seattle, Washington 98195-3330
E-Mail: Bajari@uw.edu

Stephanie Houghton
Texas A&M University
TAMU 4228
College Station, TX 77843-4228
Tel: 979-845-8685
Fax: 979-847-8757
E-Mail: houghton@econmail.tamu.edu

Steven Tadelis
UC Berkeley
Haas School of Business
Berkeley, CA 94720-1900
eBay Research Labs
2065 Hamilton Ave
San Jose, CA 94125
Tel: (510) 643-0546
Fax: (510) 642-4700
E-Mail: stadelis@haas.berkeley.edu
AB  - 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.
ER  -