Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/327681 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 12071
Publisher: 
Munich Society for the Promotion of Economic Research - CESifo GmbH, Munich
Abstract: 
We investigate profit-share auctions in a procurement context, comparing them with traditional cash auctions to identify which mechanism yields lower expenses for buyers. We also explore whether specifying a high project value in profit-share auction contracts influences supplier bidding behavior. Using theoretical analysis and experimental methods, we observe that profit-share auctions lead to lower buyer expenses compared to traditional cash auctions. Furthermore, we find that the buyer benefits from specifying a high project value in the contract, as this commitment induces more aggressive bidding from the suppliers. While profit-share auctions result in significantly lower buyer expenses than cash auctions, the observed differences are smaller than predicted. This discrepancy is due to (i) more pronounced underbidding in cash auctions and (ii) lower efficiency in profit-share auctions caused by noisy bidding. Our findings suggest that managers can reduce procurement costs by adopting profit-share auctions and strategically committing to a high project value in contracts. However, they should be aware that real-world savings may be smaller than theoretically predicted due to supplier bidding behavior.
Subjects: 
procurement
profit-share auctions
experiment
JEL: 
D44
C92
Document Type: 
Working Paper
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