Job Market Paper

The Effect of Pre-announcements on Participation and Bidding in Dynamic Auctions

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Abstract: This paper studies the participation and bidding strategies of capacity constrained bidders in a repeated auction game in which the auctioneer pre-announces information about future auctions. When bidders are forward looking, pre-announcing upcoming auctions will impact their current period strategies. I use data from Michigan highway procurement auctions to demonstrate that participation and bidding are responsive to pre-announcements, which provides strong evidence that bidders are forward looking. To quantify the effect of pre-announcements on participation and bidding strategies, I develop and estimate a dynamic auction model. I show that bidders observing pre-announcements of low expected cost contracts have significantly lower participation probabilities and modestly less aggressive bids. Based on the model estimates of costs, I quantify the impact of pre-announcements on efficiency and government expenditures. Counterfactual simulations show that when the government ceases pre-announcing future auctions, efficiency falls because the reduction in information weakens the bidders' ability to match to contracts for which they are likely to have lower costs. This less efficient matching of bidders to contracts leads to increased participation, which reduces government expenditures.