Understanding the Construction Winner's Curse using Game Theory
The winner's curse is when the winning bidder submits an underestimated bid and is thus cursed by being selected to undertake the project. This paper uses game theory to identify the degree of the winner's curse in two common construction bidding environments; namely, single-stage bidding and multi-stage bidding. The objective is to compare the aforementioned two construction bidding environments, and determine how learning from past bidding decisions and experiences can mitigate from the winner's curse. To this end, the authors (1) presented the symmetric risk neutral Nash equilibrium (SRNNE) as an optimal bid function; (2) developed simulation models for single and multi-stage construction bidding processes; and (3) analyzed the results of the simulation models, which is based on an actual dataset of California Department of Transportation projects. This research demonstrated that the majority of general contractors and sub-contractors suffer from the winner's curse in both single and multi-stage bidding environments, and that the SRNNE optimal bid function provides the contractors with a tool to avoid the winner's curse problem and to consequently gain strategic positive profits in both bidding environments. This research should reduce the industry exposure to the effects of the winner's curse in construction bidding.
M. O. Ahmed et al., "Understanding the Construction Winner's Curse using Game Theory," Proceedings of the 2016 Construction Research Congress (2016, San Juan, Puerto Rico), pp. 2160-2170, American Society of Civil Engineers (ASCE), Jun 2016.
The definitive version is available at https://doi.org/10.1061/9780784479827.215
Construction Research Congress 2016: Old and New Construction Technologies Converge in Historic San Juan, CRC 2016 (2016: May 31-Jun. 2, San Juan, Puerto Rico)
Civil, Architectural and Environmental Engineering
Keywords and Phrases
Contractors, California Department of transportation; Construction biddings; General contractors; Nash equilibria; Optimal bid functions; Risk neutrals; Sub-contractors; Winner's curse, Game theory
International Standard Book Number (ISBN)
Article - Conference proceedings
© 2016 American Society of Civil Engineers (ASCE), All rights reserved.