To Thine Own Self Be True: Asymmetric Information in Procurement Auctions

Abstract

As procurement auctions increasingly move to digital platforms, more data and information is available (or can be made available) to bidders. Despite this trend, relatively little is known about the impact of information asymmetries in these settings. We investigate two such differences in first‐price sealed‐bid reverse auctions with a common value. In a design that mirrors real construction procurement auctions, our laboratory experiment tests the impact of the precision of a bidder's cost estimate and the degree to which bidders know the inherent cost estimate precisions in the auction. We find that more understanding of estimate precision decreases bidder profit, counter to our expectation; however, we also find evidence of strategic behavior from those bidders that ratchets up pressure on competitors and pushes competitors toward bankruptcy. Most notably, understanding just one's own precision can help avoid the winner's curse in some settings. The same result does not apply if bidders also know their competitor's precision; more information does not help. The implication from our realistic setting—that reduced uncertainty may not help the bidder—raises important questions about the degree of transparency that is optimal in procurement auctions.