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Risky procurement with an insider bidder

Published online by Cambridge University Press:  14 March 2025

Jan Boone ,
Roy Chen ,
Jacob K. Goeree  and
Angelo Polydoro
Jan Boone
Affiliation:
Department of Economics, University of Tilburg, P.O. Box 90153, 5000 LE Tilburg, The Netherlands
Roy Chen
Affiliation:
Department of Economics, University of Michigan, 238 Lorch Hall, 611 Tappan Street, Ann Arbor, MI 48109-1220, USA
Jacob K. Goeree*
Affiliation:
Division of the Humanities and Social Sciences, California Institute of Technology, Mail code 228-77, Pasadena, CA 91125, USA
Angelo Polydoro
Affiliation:
Department of Economics, University of Rochester, Harkness Hall, Rochester, NY 14627, USA
*
e-mail: [email protected]
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Abstract

Procurement auctions carry substantial risk when the value of the project is highly uncertain and known only to insiders. This paper reports the results from a series of experiments comparing the performance of three auction formats in such complex and risky settings. In the experiment, every bidder knows the private value for the project but only a single insider bidder knows the common-value part. In addition to the standard second-price and English auctions we test the “qualifying auction,” a two-stage format commonly used in the sale of complex and risky assets. The qualifying auction has a fully “revealing” equilibrium that implements the revenue-maximizing outcome but it also has an uninformative “babbling” equilibrium in which bidders place arbitrarily high bids in the first stage. In the experiments, the latter equilibrium has more drawing power, which causes the qualifying auction to perform worse than the English auction and only slightly better than a sealed-bid second-price auction. Compared to the two other formats, the English auction is roughly 40% more efficient, yields 50% more revenues, avoids windfall profits for the insider, while protecting uninformed bidders from losses.

Keywords

Risky procurementExperiments

JEL classification

D44: Auctions C92: Laboratory, Group Behavior
Type
Research Article
Information
Experimental Economics , Volume 12 , Issue 4 , December 2009 , pp. 417 - 436
Copyright
Copyright © Economic Science Association 2009

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Footnotes

Electronic supplementary material The online version of this article (http://dx.doi.org/10.1007/s10683-009-9221-0) contains supplementary material, which is available to authorized users.

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