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Article: Mechanism Design in Project Procurement Auctions with Cost Uncertainty and Failure Risk

TitleMechanism Design in Project Procurement Auctions with Cost Uncertainty and Failure Risk
Authors
KeywordsReverse Auction
Bid Decision
Mechanism Design
Risk Aversion And Project Procurement
Issue Date2019
PublisherAmerican Institute of Mathematical Sciences. The Journal's web site is located at https://aimsciences.org/journals/home.jsp?journalID=5
Citation
Journal of Industrial and Management Optimization, 2019, v. 15 n. 1, p. 131-157 How to Cite?
AbstractProject procurement has two important attributes: cost uncertainty and failure risk. Due to the incomplete feature of such attributes, a novel mechanism incorporating contingent payments and cost sharing contracts is proposed for the buyer. Constructing models of bid decisions for risk averse and risk neutral suppliers, respectively, closed-form solutions of optimal bid prices are derived. By investigating the properties of bid prices in a first-score sealed-bid reverse auction, we find that when the degree of risk aversion or the variance of unpredictable cost is sufficiently small, bid prices of risk averse suppliers could be lower than those of risk neutral suppliers. Yet risk averse suppliers always bid higher than risk neutral suppliers in a second-score sealed-bid reverse auction. An interesting result verified by numerical experiments is that the classical revenue equivalence theorem no longer holds for the proposed mechanism if suppliers involve risk averse behavior. In this case, the buyer's best choice is to adopt a first-score sealed-bid reverse auction. We also provide decision support for the buyer to achieve optimal expected profit.
Persistent Identifierhttp://hdl.handle.net/10722/266010
ISSN
2019 Impact Factor: 1.366
2015 SCImago Journal Rankings: 0.639
ISI Accession Number ID

 

DC FieldValueLanguage
dc.contributor.authorQian, X-
dc.contributor.authorHuang, M-
dc.contributor.authorChing, WK-
dc.contributor.authorLee, L-
dc.contributor.authorWang, X-
dc.date.accessioned2018-12-17T02:16:31Z-
dc.date.available2018-12-17T02:16:31Z-
dc.date.issued2019-
dc.identifier.citationJournal of Industrial and Management Optimization, 2019, v. 15 n. 1, p. 131-157-
dc.identifier.issn1547-5816-
dc.identifier.urihttp://hdl.handle.net/10722/266010-
dc.description.abstractProject procurement has two important attributes: cost uncertainty and failure risk. Due to the incomplete feature of such attributes, a novel mechanism incorporating contingent payments and cost sharing contracts is proposed for the buyer. Constructing models of bid decisions for risk averse and risk neutral suppliers, respectively, closed-form solutions of optimal bid prices are derived. By investigating the properties of bid prices in a first-score sealed-bid reverse auction, we find that when the degree of risk aversion or the variance of unpredictable cost is sufficiently small, bid prices of risk averse suppliers could be lower than those of risk neutral suppliers. Yet risk averse suppliers always bid higher than risk neutral suppliers in a second-score sealed-bid reverse auction. An interesting result verified by numerical experiments is that the classical revenue equivalence theorem no longer holds for the proposed mechanism if suppliers involve risk averse behavior. In this case, the buyer's best choice is to adopt a first-score sealed-bid reverse auction. We also provide decision support for the buyer to achieve optimal expected profit.-
dc.languageeng-
dc.publisherAmerican Institute of Mathematical Sciences. The Journal's web site is located at https://aimsciences.org/journals/home.jsp?journalID=5-
dc.relation.ispartofJournal of Industrial and Management Optimization-
dc.rightsJournal of Industrial and Management Optimization. Copyright © American Institute of Mathematical Sciences.-
dc.rightsThis is a pre-copy-editing, author-produced PDF of an article accepted for publication in [insert journal title] following peer review. The definitive publisher-authenticated version [insert complete citation information here] is available online at: xxxxxxx [insert URL that the author will receive upon publication here].-
dc.subjectReverse Auction-
dc.subjectBid Decision-
dc.subjectMechanism Design-
dc.subjectRisk Aversion And Project Procurement-
dc.titleMechanism Design in Project Procurement Auctions with Cost Uncertainty and Failure Risk-
dc.typeArticle-
dc.identifier.emailChing, WK: wching@hku.hk-
dc.identifier.authorityChing, WK=rp00679-
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.3934/jimo.2018036-
dc.identifier.scopuseid_2-s2.0-85063125753-
dc.identifier.hkuros296266-
dc.identifier.volume15-
dc.identifier.issue1-
dc.identifier.spage131-
dc.identifier.epage157-
dc.identifier.isiWOS:000450650500008-
dc.publisher.placeUnited States-

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