Selective Entry in Highway Procurement Auctions

Abstract

When participating in an auction is costly, a potential bidder has to decide whether to enter the auction or not. The extent to which the potential bidders know their private cost before making their entry decisions determines how selective the entry process is. Endogenous selective entry is common in many auctions and it has important implications for designing auctions, in particular, choosing the bid discount policy that is frequently used in public procurements to achieve distributional goals of the government. Prior empirical studies of the bid preferences were based on frameworks that either did not explicitly model endogenous participation or assumed endogenous, but non-selective participation. This study empirically investigated whether the entry process is selective in the highway procurement auctions run by the California Department of Transportation. To this end, the asymmetric affiliated-signal model was adapted to permit endogenous selective entry. Model parameters, including entry costs and distributions of construction costs for regular and fringe companies, were estimated nonparametrically. The results show evidence favoring selective entry of the fringe firms and imply that the level of bid discount required to achieve the procurement buyer’s policy objective may be lower than what is previously found in the literature under the assumption of non-selective entry.

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Notes

  1. 1.

    Firms promoted by Caltrans include SB, disadvantaged business enterprises, and disabled veteran business enterprises. Information can be found on Caltrans website (Caltrans 2020a).

  2. 2.

    Excluded were contracts from 2001 and the first half of 2003 whose details are no longer available from Caltrans (Caltrans 2020b).

  3. 3.

    Prior studies of Caltrans auctions typically used the number of project plan holders as a proxy for the number of potential bidders, but this measure is not available in the data used for this study.

  4. 4.

    The third quartile of the same measure among all observed bids in the sample is 110. Eighty-two contracts in the sample did not have any same-district contracts in the past 90 days, in which case, the four most recent of such contracts were used, where four is the median number of the same measure in the sample excluding those 82 contracts.

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Acknowledgments

I thank my thesis advisor Professor Gaurab Aryal for his invaluable guidance and mentorship, as well as Professor Amalia Miller and Professor John Pepper for their support. I also thank Jiafeng Wu, Charles Moens, and participants of the Distinguished Majors Seminar at the University of Virginia.

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Correspondence to Sabrina Peng.

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Peng, S. Selective Entry in Highway Procurement Auctions. Atl Econ J 48, 519–533 (2020). https://doi.org/10.1007/s11293-020-09690-2

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Keywords

  • Procurement auctions
  • Endogenous entry
  • Selection
  • Bid discount policy

JEL

  • D44
  • H57
  • L74