job market paper

Research | Job Market Paper

Heterogeneous uncertainty in procurement auctions with unknown competitors: a structural estimation of heteroskedasticity

Abstract: While economists often treat heteroskedasticity as a statistical technicality, heteroskedastic outcomes in certain market settings can arise out of heterogeneous uncertainty. Procurement auction, in particular, poses two sources of uncertainty because it exhibits both private-value and common-value characteristics. When firms cannot observe the number of bidders, a third dimension of uncertainty is added, and the effect of asymmetric information readily emerges in such highly uncertain environments. By exploiting the heteroskedasticity of normalized bids with respect to firm size in highway procurement auctions, I estimate the structural parameters of both uncertainty and its heterogeneity within a semiparametric generalized method of moments framework. The estimation results allow further analyses of firm behavior and auction design through calibration and counterfactuals. In addition, the paper shows that structural parameters can be extracted from heteroskedasticity under fairly simple assumptions, and the method may be extended to the study of other market settings with heteroskedastic outcomes.