Auctions are important and widely used trading mechanisms. Bidders often undertake investments in relation to an auction they participate in. For example, firms may invest in research and development prior to bidding for public procurement in order to reduce their costs or improve the quality of the goods and services they are offering. The main objective of the proposed research project is to further understand bidders’ incentives for these types of investments and how these incentives interact with the auction rules, and the consequences in terms of efficiency and the seller’s revenue (or the cost of procurement). This understanding will have both theoretical and practical implications in terms of auction design. The project will also be a contribution to the endogenous entry literature.
One of the distinguishing features of the project in comparison to the previous literature is allowing firms to have private information at the time of investment, which is quite natural, as firms know more about their own profitability than their competitors. Second, the question of the timing of investments will be addressed, since firms can invest after as well as before the auction. Finally, the issue of observability of investments (at the auction stage) will be tackled. In this general framework, it will be possible to study the firms’ incentives to invest and investigate the performance of commonly used auction formats in terms of efficiency and the revenue of the seller under various specifications. In addition, optimal auctions will be studied using the mechanism design approach.
The proposed research project is theoretical. It also aims to help future empirical studies of investments and entry in auctions. It will also be of interest to policy makers, given that auctions are commonly used in government procurement and in selling public assets, and that investment opportunities are ubiquitous in these settings.
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