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Paulo Somaini
Job Market Candidate
Stanford University
Department of Economics
579 Serra Mall
Stanford, CA 94305
650-575-8623
[email protected]
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Research
Competition and Interdependent Costs in Highway Procurement (Job Market Paper)
I investigate the effect of competition on bidder behavior and procurement
cost using highway auction data from Michigan. While a bidder's distance to
a project location is important in explaining participation and bid levels,
there is no evidence of more aggressive bidding when competitors are located
close to the project. This pattern is at odds with theoretical predictions
based on first-price auctions with private costs but can be rationalized by
a more general model that allows firms to have nonindependent private
information and partially common costs. I show that such a model is
identified from observable variation in bidder specific cost-shifters, and
develop an estimation procedure that exploits variation in project
locations. The findings point to significant common costs and to a high
degree of correlation in private information. Model estimates are used to
show that common costs and information correlation reduce the effect of
competition on procurement costs by 28 percent relative to a benchmark that
assumes independent private costs. Moreover, subsidies to weak bidders are
estimated to cost 27 percent more than in the private costs benchmark.
Nonparametric Identification of Interdependent Costs Auction Models
In first-price and
second-price sealed-bid auctions the distribution of bids conditional on
publicly observable bidder-specific cost shifters identifies the primitives
of the interdependent cost model. The main assumption is that bidders'
expected costs are affected by their own cost shifters but are unaffected by
competitors'. The argument is simpler in second-price sealed-bid procurement
auctions. Under private costs, it is always optimal to submit a bid equal to
the expected costs regardless of competitors' costs or information.
Competitors' cost shifters should not affect the distribution of own bids.
Under interdependent cost, in contrast, shifts in competitors' cost shifters
that soften competition imply less selection conditional on winning (e.g.
less concern of winners' curse), so the optimal bid changes. The full
information cost, a function of own and competitors'
information, can be recovered from changes in the distribution of bids due
to variation in competitors' cost shifters. In first price auctions, it is
necessary to take into account the effect of competitors' cost shifters on
markups using the standard first order condition.
A Model of Market Power in Customer Markets (with Liran Einav)
We develop a model for studying dynamic competition in customer markets. Customer markets -- environments in which frictions lead to partial lock-in of customers with a specific product -- are likely to have important effects for the exercise of market power by firms. Due to the dynamic aspect associated with customer retention and acquisition, pricing incentives may be quite different compared to more traditional, static product markets. Studying dynamic competition is difficult, and often has to rely on numerical analysis. The model we propose, while highly stylized, maintains certain symmetry properties, which allows us to obtain existence and uniqueness of equilibrium. These properties allow us to study the comparative statics of the model in a simple way. To illustrate, we derive a closed-form relationship between average equilibrium markups and Herfindahl index, and illustrate how the model can be used to analyze the effect of mergers in such a dynamic environment.
Path-Dependent Import-Substitution Policies: The Case of Argentina in the 20th Century (with Sebastian Galiani)
We use a simple three-sector model to narrate the economic history of Argentina during the 20th century as seen through the prism of its integration into and disintegration from the world economy. Assuming that capital moves between the primary and secondary sectors more slowly than labor moves between the secondary and tertiary sectors, we show that import-substitution policies exhibit path dependence. We contend that the endogenous industrialization of the inter-war period generated political changes that paved the way for import-substitution industrialization during the post-war period. Even if this inward-oriented strategy failed to spur economic growth, protectionist policies became entrenched. In the absence of mature political institutions, the liberalization process was delayed and, when it finally did occur, it was extremely costly.
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