NONPARAMETRIC ESTIMATION OF ENTRY COST IN FIRST-PRICE PROCUREMENT AUCTIONS

Authors


Correspondence to: PAI XU, School of Economics and Finance, University of Hong Kong, Hong Kong, China. E-mail: paixu@hku.hk

SUMMARY

In this paper, I investigate Samuelson's low-price auction model with entry costs. The model's equilibrium implies that the distribution of bids is truncated at the threshold for participation. I use the model to estimate the cost of participation in Michigan highway procurement auctions. The null hypothesis of zero entry costs is rejected. Using my empirical results, I then construct an estimate of the optimal auction, which employs regular policy tools such as entry fees. Finally, I demonstrate the savings that the Michigan government could have made on payments if optimal auctions had been employed. Copyright © 2012 John Wiley & Sons, Ltd.

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