A Numerical Study with Experimental Data on Risk-Averse Subcontractors in Procurement Auctions with Subcontract Bids

Prime contractors often solicit estimates for part of their work from potential subcontractors who can perform that work on their behalf with lower costs, prior to submitting their own estimates in procurement auctions. In a simple model for capturing this aspect of procurement auctions, this note clarifies through a numerical study with experimental data an important factor for obtaining clearer results in the experimental sessions. It was shown that unclear results observed in the sessions conducted previously would be due to the presence of extreme patterns in the distributions of risk aversion rates among the participants. We need to control the extreme risk aversion rates of participants for designing the experiment for future research.

I. Introduction

In order to lower total costs, prime contractors often solicit estimates for part of their work from potential subcontractors who can perform that work on their behalf with lower costs, prior to submitting their own estimates in procurement auctions. In this situation, the subcontractors behave as if they were bidding for the subcontract work in auctions conducted by the prime contractors. [3] presented a theoretical model for capturing this aspect of procurement auctions as simply as possible and considered the strategic behavior of subcontractors in the model, assuming that subcontractors are risk-neutral.