Bidding for Contracts under Uncertain Demand: Skewed Bidding and Risk Sharing

Hidenori Takahashi (Hitotsubashi University)

September 2, 2019, 14:00–15:30

Room MS 001

Industrial Organization seminar


Procurement contracts often involve substantial uncertainty in project outcomes at the time of bidding. Whether the procurer of a contract bears such project risk depends on the specific contractual agreement. Using data from the Florida Department of Transportation, we document evidence that i) the procurer’s choice over the type of contract depends on unobserved project heterogeneity, and ii) potential contractors behave opportunistically via skewed bidding for contracts wherein the contractor bears the project risk. We develop and estimate a model of bidding for contracts that captures the bidder’s tradeoff between skewed bidding and risk exposure. Both efficient and inefficient bidders bid aggressively via skewed bidding. Counterfactual experiments suggest that the onus of bearing project risk should fall on the procurer (contractor) when project risk is large (small).