“Small Business Set-asides in Procurement Auctions: An Empirical Analysis,” Working Paper
As part of public procurement, many governments adopt small business programs to provide contract opportunities for businesses often with preferences for firms operated by members of groups designated as disadvantaged. The redistribution arising from such programs, however, can introduce significant added costs to government procurement budgets. In this paper, the extent to which small business set-asides increase government procurement costs is examined. The estimates employ data on Japanese public construction projects, where approximately half of the procurement budget is set aside for small and medium enterprises (SMEs). Applying a positive relationship between profitability and firm size obtained by the non-parametric estimation of asymmetric first-price auctions with affiliated private values, a counterfactual simulation is undertaken to demonstrate that approximately 40 percent of SMEs would exit the procurement market if set-asides were to be removed. Surprisingly, the resulting lack of competition would increase government procurement costs more than it would offset the production cost inefficiency.
“Procurement Auctions with Pre-award Subcontracting,” Working Paper
To be the lowest bidder in procurement auctions, prime contractors commonly solicit subcontract bids at the bid preparation stage. A remarkable feature of the subcontract competition is that ``winning is not everything;'' the lowest subcontractor gets a job conditional on his prime contractor's successful bid. This paper makes the first attempt to establish a model for such pre-award subcontract auctions included in procurement auctions. I find that subcontractors strategically provide larger discounts on their bids in response to increasing competition among prime contractors. As a result, the revenue maximizing reservation price in the downstream auction is decreasing in the number of bidders. It is also shown that, if the prime contractors' endogenous participation in the auction is taken into account, subsidizing the potential bidders' entry is a remedy to solve the double marginalization problem, allowing the auctioneer to extract more rents from subcontractors.
“Equilibria in Asymmetric Auctions with Entry&rdquo,; Working Paper
Regarding optimal design in the private value environment, there is an unsolved discrepancy in the literature regarding asymmetric auctions and auctions with endogenous participation; Literature on the former suggests that well-designed distortive mechanisms are optimal (revenue maximizing) assuming the bidding costs are negligible, while that on the latter insists that the mechanisms with free entry and no distortion are optimal provided that the potential bidders are ex ante symmetric. This paper is the first attempt to reconcile the two views by establishing a model for asymmetric auctions with costly participation. The main findings are threefold; First, an optimal outcome is possible if and only if the mechanism is ex post efficient. Second, without any participation control, a coordination problem is likely in which only the weak bidders participate and the strong bidders stay out. Finally, there is an entry fee/subsidization scheme which, together with an ex post efficient mechanism, induces the optimal outcome as a unique equilibrium.