Procurement with competing insiders

Abstract

The tournament auction is a novel approach to studying procurement in which a group of entrants compete for the chance to face a strong incumbent, or insider. I introduce competing insiders and risk aversion to this form of procurement auction and analyse how these factors affect optimal bidding behaviour. Increasing the number of strong insiders significantly decreases the degree of above-value bidding that is present with a single insider. In contrast, risk aversion increases above-value bidding relative to risk neutrality, but has a weaker effect than the number of insiders on bidding behaviour. Therefore, even with risk-averse bidders, bids eventually approach bidders’ values when the number of insiders grows large.