Journal Article

Investment Incentives in Procurement Auctions

Leandro Arozamena and Estelle Cantillon

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 71, issue 1, pages 1-18
Published in print January 2004 | ISSN: 0034-6527
Published online January 2004 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/0034-6527.00273
Investment Incentives in Procurement Auctions

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This paper investigates firms' incentives to invest in cost reduction in the first price sealed bid auction, a format largely used for procurement. Two central features of the model are that we allow firms to be heterogeneous and that investment is observable. We find that 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 and that this is socially inefficient. These results have implications for market design when investment is important.

Keywords: D44; G31

Journal Article.  8643 words.  Illustrated.

Subjects: Corporate Governance ; Market Structure and Pricing

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