Number of Bidders and the Winner’s Curse in Toll Road Concessions: An Empirical Analysis

In this paper, we empirically assess the effects of the winner’s curse in auctions for road concession contracts. Such auctions are private- and common-value auctions, and they are on concession contracts which are incomplete contracts prone to pervasive renegotiations (Guasch 2004, Engel 2005, Athias-Saussier 2006). We address three questions in turn. First, we investigate the overall effects of the winner’s curse on bidding behaviour in such auctions. Second, we examine the effects of the winner’s curse on contract auctions with differing levels of common-value components. Third, we investigate how the winner’s curse affects bidding behaviour in such auctions when we account for the possibility for bidders to renegotiate. Using a unique dataset of 37 road concessions worldwide, we show that the winner’s curse effect is particularly strong in toll road concession contract auctions, implying the prevalence of common value components over private value components in such auctions. Thus, we show that bidders bid less aggressively in toll road concession auctions when they expect more competition. Besides, we observe that this winner’s curse effect is even larger for projects where the common uncertainty is greater. Perhaps more interestingly, we show that the winner’s curse effect is weaker when the likelihood of renegotiation is higher, i.e. bidders will bid more strategically in weaker institutional frameworks, in which renegotiations are easier.