Testing Vickery’s Revenue Equivalence Theory in Construction Auctions
Publication: Journal of Construction Engineering and Management
Volume 132, Issue 4
Abstract
Construction work is often allocated to contractors via first price sealed bid auctions (FPA). American Nobel Prize winner and economist William Vickery, however, suggested that second price auctions (SPA) (i.e., the lowest bidder wins the contract at the second lowest price) may be more beneficial due to the revenue equivalence theory (RET). This implies that, upon certain conditions being met, clients can, in the long run, expect to pay approximately the same to contractors irrespective of whether contracts are awarded according to an FPA or SPA. At the same time, it is expected to be easier to bid in an SPA. In the absence of real world data, the likely effects of using SPA for construction were examined experimentally. This involved experienced respondents bidding on over 60 identical FPA and SPA. Contrary to expectations, the bids for the SPA were significantly higher, indicating that RET is unlikely to occur in practice in construction bidding.
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Acknowledgment
This research was supported by the Research Grants Council, University Grants Committee of Hong Kong, through Grant PolyU 5004/99E.
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Information & Authors
Information
Published In
Journal of Construction Engineering and Management
Volume 132 • Issue 4 • April 2006
Pages: 425 - 428
Copyright
© 2006 ASCE.
History
Received: Jul 14, 2003
Accepted: Jul 28, 2005
Published online: Apr 1, 2006
Published in print: Apr 2006
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