Procurements with Bidder Asymmetry in Cost and Risk-Aversion

TL;DR

This paper introduces an empirical Bayesian method to analyze first-price procurement data with asymmetric risk preferences and costs, revealing significant bidder heterogeneity and implications for optimal reserve pricing.

Contribution

It develops a novel Bayesian approach to account for bidder asymmetry in risk-aversion and costs, providing insights into procurement strategies and policy impacts.

Findings

Bidder heterogeneity in risk-aversion and costs is significant.

Inviting more bidders can substantially lower procurement costs.

Imposing risk-neutrality leads to misleading inferences.

Abstract

We propose an empirical method to analyze data from first-price procurements where bidders are asymmetric in their risk-aversion (CRRA) coefficients and distributions of private costs. Our Bayesian approach evaluates the likelihood by solving type-symmetric equilibria using the boundary-value method and integrates out unobserved heterogeneity through data augmentation. We study a new dataset from Russian government procurements focusing on the category of printing papers. We find that there is no unobserved heterogeneity (presumably because the job is routine), but bidders are highly asymmetric in their cost and risk-aversion. Our counterfactual study shows that choosing a type-specific cost-minimizing reserve price marginally reduces the procurement cost; however, inviting one more bidder substantially reduces the cost, by at least 5.5%. Furthermore, incorrectly imposing risk-neutrality would severely mislead inference and policy recommendations, but the bias from imposing homogeneity in risk-aversion is small.