François Maréchal

Free Riding in Combinatorial first-price sealed-bid Auctions

We consider an allotted procurement contract awarded by means of a combinatorial first-price sealed-bid auction. Two small firms and a larger firm are competing. Each small firm is interested in a single lot whereas the large firm transmits a global offer. Under a specific informational framework, we derive the asymmetric combinatorial equilibrium bidding strategies and show that they exhibit a free-riding effect. We show that this effect is increasing with the level of uncertainty and decreasing with risk aversion. When all the firms are risk neutral or equally risk averse, the magnitude of the free-riding effect is unaffected by the division of the contract chosen by the public buyer. Nevertheless, when each firm exhibits its own risk aversion parameter, we find that the free-riding effect is reduced (resp. increased) as the more risk averse small firm competes for a larger (resp. smaller) part of the contract.

The Optimal Contract under Adverse Selection in a Moral-Hazard Model with a Risk-Averse Agent

This paper studies the optimal contract offered by a risk-neutral principal to a risk-averse agent when the agent’s hidden ability and action both improve the probability of the project being successful. We show that if the agent is sufficiently prudent and able, the principal induces a higher probability of success than under moral hazard, despite the costly informational rent given up. Moreover, there is distortion at the top. Finally, the conditions to avoid pooling are difficult to satisfy because of the different kinds of incentives to be managed and the overall trade-off between rent extraction, insurance, and efficiency involved.