Investment Incentives in Procurement Auctions

Leandro Arozamena and Estelle Cantillon

No 1276, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We investigate firms' incentives for cost reduction in the first price sealed bid auction, a format largely used for procurement. A central feature of the model is that we allow firms to be heterogeneous. Though private value first price auctions are not games with monotonic best responses, we find that for comparative statics purposes they behave like these games. In particular, firms will tend to underinvest in cost reduction because they anticipate fiercer head-on competition. Using the second price auction as a benchmark, we also find that the first price auction will elicit less investment from market participants. Moreover, both auction formats tend to favor investment by the current market leader and are therefore likely to reinforce asymmetries among market participants.

Keywords: Asymmetric auctions; endogenous distributions; investment incentives (search for similar items in EconPapers)
JEL-codes: C72 D44 L13 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2000-09
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Published in Review of Economic Studies (2004), 71(1): 1-18

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Related works:
Journal Article: Investment Incentives in Procurement Auctions (2004)
Working Paper: Investment incentives in procurement auctions (2004)
Working Paper: Investment Incentives in Procurement Auctions (2001)
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