Winner's Curse and Entry in Highway Procurement

Abstract

In procurement auctions, there are situations where a bidder's cost is uncertain at the time of bidding, leading to a "winner's curse." We use bridgework data from the State of Oklahoma and an empirical auction model to explore whether the winner's curse also affects entry, which can have serious implications for procurement costs and efficiency. We find that the winner's curse generally reduces entry in Oklahoma by reducing bidder markups conditional on participating. We then investigate implications for entry taxes and subsidies.