How Subsidies Affect Asymmetric Procurement Auctions : Comparing Experimental Results to Theory

The use of bid preference auctions, where one class of bidders is offered favored treatment over another class, has received mixed attention in the literature. Research has shown there is an economic benefit of such policies thanks to lower costs for procurement auction buyers as incentives are offered to disadvantaged sellers. In this paper, we study one type of preferential procurement auction: the subsidy. Using a set of controlled experiments, we compare actual bidder behavior to what is predicted in equilibrium. We find that sellers suffer from overly aggressive bidding (but do learn over time). More importantly, we explore the behaviors that may explain any deviations from theory – focusing on best response bidding and what directional learning theory would predict based on prior round outcomes. We find evidence of myopic behaviors among bidders. One intriguing take-away is that cost-advantaged bidders may be more responsive to opponents’ bids. Due to the wide use of bid preference auctions to support both policy and social aims, our findings have both financial and societal implications