Bidding for Incomplete Contracts: An Empirical Analysis

Joint with: Stephanie Houghton and Steve Tadelis

When procurement contracts are incomplete, they are frequently changed after the contract is awarded to the lowest bidder. This results in a final cost of production that differs from the initial price, and may also involve significant transaction costs due to adaptation and renegotiation. We propose a stylized model of bidding for incomplete contracts and apply it to bidding data for highway repair contracts. Reduced form regressions suggest that bidders respond strategically to contractual incompleteness and that transaction costs are an important determinant of the observed bids. We then estimate a semiparametric structural auction model that allows us to recover an estimate of transaction costs. Our estimates suggest that on average transaction costs account for about ten percent of the winning bid and we conclude that transaction costs are a significant source of

inefficiency in this market.

For more information, contact Jere Behrman.