In the IJIO, Tim Hubbard and my colleague Harry Paarsch break new ground. You can have the traditional abstract of their paper, like so:
At procurement auctions, with bid preferences, qualified firms are treated special. A common policy involves scaling the bids of preferred firms by a discount factor for the purposes of evaluation only. Introducing such an asymmetry has three effects: first, preferred firms may inflate their bids, yet still win the auction; second, nonpreferred firms may bid more aggressively than in the absence of preferences; third, the preference policy can affect participation. For different cost distributions, we solve numerically for the equilibrium bid functions under different discounts and then simulate behaviour. Our approach allows us to quantify the relative importance of the three effects. We find that the participation effect is relatively unimportant and, in most cases, a positive cost-minimizing preference rate exists.
or you can watch the video. Actually, the video didn’t download properly and was better viewed online. It also was really audio so we could have done without the video part. Nonetheless, it is interesting to see this development occurring.