Construction bidding and the winner's curse

Type Thesis

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Summary

In the construction industry, the winner's curse occurs when the winning contractor has underestimated the project's true cost. Using a game and auction theory approach, this study aims to analyze - and potentially reduce - industry exposure to the effects of the winner's curse in construction bidding. A simulation model for single and multi-stage bidding processes was developed and analyzed an actual dataset of California Department of Transportation projects. The majority of general contractors and sub-contractors suffer from the winner's curse in both single and multi-stage bidding environments. The multi-stage bidding environment incurs more losses than the single-stage bidding environment. Through learning from past experiences though, the multi-stage bidding environment provides contractors with better opportunity to avoid the winner's curse. Finally, it was shown that the symmetric risk neutral Nash equilibrium optimal bid function provides the contractors with a tool to avoid the winner's curse and gain strategic positive profits.