Skew to win, not to profit – unbalanced bidding among informed bidders
| Published date | 04 March 2019 |
| Date | 04 March 2019 |
| DOI | https://doi.org/10.1108/JOPP-03-2019-024 |
| Pages | 46-54 |
| Author | Johan Nyström,Svante Mandell |
| Subject Matter | Public policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public finance/economics,Taxation/public revenue |
Skew to win, not to
profit–unbalanced bidding
among informed bidders
Johan Nyström
The Swedish National Road and Transport Research Institute (VTI),
Stockholm, Sweden, and
Svante Mandell
National Institute of Economic Research, Stockholm, Sweden
Abstract
Purpose –Several sectors, especially the construction industry, use unit price contracting (UPC). This
contractingform provides agents, ex ante, with estimatedquantities of the work to be done. Competing agents
then offer corresponding unit prices i.e. the bid is a price vectors, and mostoften the lowest vector sum is
awarded the contract. This way of procuring is not only transparent but also entails a potential problem of
unbalancedbidding. Unbalanced bidding occurs when an informedagent skews unit prices to win the ex ante
bid. The concept is not new topic in research, but theoreticalmodels from an economics perspective are not
extensive.
Design/methodology/approach –This paper will focus on how competition among informedbidders
will affectthe optimal solution.
Findings –It is shown that skewing is still a dominating strategyunder competition. However, competition
will decrease,but not necessarily eliminate, informationrents.
Originality/value –In this setting, unbalancedbidding could mainly be seen as a way to win the contract
and not to extract informationrents. Thus, it would not constitute an efficiency problem for the client.
Keywords Modelling, Public procurement, Unbalanced bidding, Unit price contracting
Paper type Research paper
Introduction
In contrast to private clients, government agencies cannot rely on implicit contracting and
the self-enforcing mechanisms to obtain first best outcomes. Instead, government agencies
need to adapt formal contracts throughpublic procurement. A common form of doing this is
to use unit price contracts (UPCs). In UPCs, theclient provides a bill of estimated quantities
and the bids from the contractors consist of corresponding unit prices for e.g. building a
road. Apart from relative low transactioncost for the tendering process and transparency in
evaluating the bids, this contracting form also has some drawbacks. Negative aspects
consist of agency problems, where it is hard for the principal to align the incentives forthe
contractor. Such problems include lack of incentives for innovations and the potential
dilemma of receiving unbalanced bids. Unbalanced bidding occurs when informed bidders
skew unit prices to lower the ex ante bid and allegedly raise the ex post profit(
Stark, 1974).
This entails inefficient information rents due to asymmetric information, where the client
ends up paying too much.
The authors appreciate the financial support from the Swedish Competition Authority.
JOPP
19,1
46
Journalof Public Procurement
Vol.19 No. 1, 2019
pp. 46-54
© Emerald Publishing Limited
1535-0118
DOI 10.1108/JOPP-03-2019-024
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1535-0118.htm
To continue reading
Request your trial