Understanding the Construction Winner's Curse using Game Theory

Abstract

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.

Meeting Name

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)

Department(s)

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)

978-078447982-7

Document Type

Article - Conference proceedings

Document Version

Citation

File Type

text

Language(s)

English

Rights

© 2016 American Society of Civil Engineers (ASCE), All rights reserved.

Publication Date

01 Jun 2016

Link to Full Text

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