Endogenous risk in unbalanced bidding

Abstract

Models of unbalanced bidding in unit price contracts (UPC) can be categorised into two types. The first category assists clients in detecting and contractors in optimising skew bidding. More theoretical oriented models of the second type focus on bidding behaviour in order to study market efficiency. These models predict corner solutions, i.e. zero prices, for unit prices of expected overestimated quantities. However, anecdotal evidence indicates a lack of zero prices in the actual contracts. A possible explanation for this discrepancy is riskaversion of the contractor. However, none of the models of the latter category have incorporated risk as an endogenous variable. A model of such is presented in this paper.