Procurements with Bidder Asymmetry in Cost and Risk-Aversion

ABSTRACT

We propose an empirical method to analyze data from first-price procurements where bidders are asymmetric in their risk-aversion (CRRA) coefficients and distributions of private costs. Our Bayesian approach evaluates the likelihood by solving type-symmetric equilibria using the boundary-value method and integrates out unobserved heterogeneity through data augmentation. We study a new dataset from Russian government procurements focusing on the category of printing papers. We find that there is no unobserved heterogeneity (presumably because the job is routine), but bidders are highly asymmetric in their cost and risk-aversion. Our counterfactual study shows that choosing a type-specific cost-minimizing reserve price marginally reduces the procurement cost; however, inviting one more bidder substantially reduces the cost, by at least 5.5%. Furthermore, incorrectly imposing risk-neutrality would severely mislead inference and policy recommendations, but the bias from imposing homogeneity in risk-aversion is small.

KEYWORDS:

• Asymmetric first-price procurements
• Asymmetric risk-aversion
• Identification and estimation
• Statistical decision theory
• Unobserved heterogeneity

Supplementary Materials

See Aryal et al. (2022).

Acknowledgments

This work was carried out using the computational facilities of the Advanced Computing Research Centre, University of Bristol (https://www.bristol.ac.uk/acrc) and the Research Computer Centre, University of Queensland (https://rcc.uq.edu.au).

Disclosure Statement

The authors report there are no other competing interests to declare.