Economic Theory Seminar Series - Hidenori Takahashi (Kyoto University)

Title: Bidding Too Low to Win and Too High to Lose? The Roles of Secret Floor Prices in Renegotiation of Incomplete Contracts

Abstract: Renegotiation for contract adjustments is pervasive in procurement auctions. Yet, the associated adaptation costs are hard to measure under the standard auction settings since initial contracts may be specified endogenously. We study construction contracts awarded through a secret floor price rule and build a model that links bidding strategies to subsequent renegotiation for contract adjustments. We show that a secret floor price induces a kinked bidding strategy and enables identification of adaptation costs by breaking the endogeneity of the initial contract design through random contract allocation. We estimate the welfare implications of adaptation costs while jointly recovering the other primitives that would otherwise confound the welfare assessment.