The Real Price of Construction: Identification and Estimation of an Asymmetric Model of Entry

Risk aversion has been shown to have adverse effects on agents’ bidding. In private value auctions, risk aversion induces more aggressive bidding, whenever the number of participants remain unchanged. Risk aversion may also prevent agents from entering the auction, in the first place, if a certain outcome is available, which lessens competition and, eventually the agent’s bids. Moreover, if bidders incur a cost to learn their values, as in construction procurement auction where plans may need to be drawn, and/or ground may need to be tested, the optimal auction mechanism should consider both the determinants to the firm’s entry, and the factors which affect its bidding. This paper studies a two-stage model of heterogenous risk averse bidders which decide first wether to enter or not the auction, learn their valuation upon entry, then submit their bid. I show that the model is semiparametrically identified, and propose a two-stage estimation procedure of the model primitives. The estimates yield a measure of the price of entry, or real price of construction: the bidder’s certainty equivalent of the auction.