Working papers in Transport Economics
Why are bids not more unbalanced?
() and Johan Nyström
Abstract: Earlier theoretical models of unbalanced bidding in unit
price contracts (UPC) ofter predict corner solutions, i.e. zero bids for
unit prices of expected overextimated quantities. However, anecdotal
evidence indicates a lack of zero bids in the actual contracts. We pursue a
possible explanation for this anomaly in risk-aversion of the contractor.
Using a simple model we show that a contractor with superior information
may exploit this in the bidding process to increase her expectd revenue.
However, in so doing she increases her risk exposure. If the contractor is
risk-averse, she typically will avoid a corner solution to this risk vs.
expected return trade-off.
Keywords: Unbalanced bidding; risk; modelling; unit price contraction; public procurement; (follow links to similar papers)
JEL-Codes: D82; D86; H51; L51; (follow links to similar papers)
12 pages, November 2, 2011
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