A sequential bidding model for public-private partnerships: theory versus laboratory

Public-private partnerships are globally gaining importance in the construction industry. The risk transfer from the contracting government towards the private entity has important repercussions on the tender. Contractors need to carefully prepare the bid proposal and need to make an assessment of the project risk. These investigations require expensive investment efforts that might go down the drain in case the bidder loses the tender. A second choice relates to the requested mark-up that reflects the profit aims and the risk premium. The competitive context might be an inhibitor for players to participate in the tender process. The research project develops a sequential procurement model to imitate the PPP market. We consider a set of equivalent project opportunities in a finite project pipeline and a set of players entering the tender. The bidders are heterogeneous in their experience, so that more experienced contractors have a cost advantage and, additionally, they are able to more accurately estimate the project cost. Besides, winning a project results in an experience increase. The Markov perfect equilibrium of this sequential game is heuristically approximated by a best response mechanism. We experimentally show that the introduction of a pipeline results in fiercer competition from a mark-up perspective. Nevertheless, including future project opportunities does not necessarily lead to a greater investment willingness. Consequently, triggering the increased bid proposal efforts might require the introduction of bid cost reimbursements. The study also reports on the findings from a laboratory experiment with 180 business students in this PPP setup. The students consistently underbid compared to the theoretical equilibrium, which inflates the risk of default.status: publishe