Incentives, information, and winner's curse in construction industry bidding

Abstract

This paper investigates the relationship between incentives, information and winner's curse in the bidding for construction industry contracts. The approach uses both simple Monte Carlo simulations and bidding experiments to show the effects of changing levels of information (in terms of variance) and incentive (in terms of risk share) on the winner's curse. I. INTRODUCTION This paper ties together three distinct and rich areas of bidding literature that are important to the understanding and dealing with these uncertainties: Incentive Contracts, Information and winner's curse. This investigation was conducted using both simple Monte Carlo simulations and student bidding experiments. Student experiments were performed using seniors and graduate students in Civil Engineering at Portland State University. Both the simulations and the experiments were designed to investigate the relationship between varying levels of information available to bidders, the ensuing aggressiveness of the bidding (resulting in a winner's curse) and the effect of increasing the share of risk to the Owner. A. A Brief Review of Auction and Bidding Theory There are many surveys of auction theory in the operations research, management science and economics literature. Some of the more complete include [8, 18, 23, 34]. An auction is an economic institution designed for the exchange of goods or services, where the exact selling or purchase price of the good or service is unknown prior to the auction. The price of the exchange is established by bidding among parties wishing to either purchase or sell the good or service. Types of auctions are distinguished by the rules determined by the bid-taker. The various auction types in general use can be classified by following characteristics: highest or lowest bid, first or second price, private or common value, in combination with open (often oral) or closed (typically sealed) bidding. This paper is concerned with the most common form of bidding used in the construction industry, lowest bid, first price, common value, closed or sealed bid auctions [26].

A Game Theoretical Approach for Solving Winner Determination Problems

“…If the FCC used traditional auctions in selling a group of spectra to a single buyer, for example, the English auctions, the bidders may win some nonsuccessive spectra. Thus, the winners will drop out the auction because the expected utility is not achieved [1]. After the FCC used the combinatorial auction to sell the electromagnetic spectra, the combinatorial auctions are widely applied to solve the optimization problems, such as the study of economic performance [2] and task assignment [3].…”

“…iii) A utility function . Each player's utility function is the revenue of the auctioneer in the WDP, as shown in(1).…”