Empirical Simulation to Compare Opportunistic Bidding Behavior in China and the U.S.A.

Abstract

In the construction industry, previous research has shown that stable partnerships between contractors and subcontractors can evolve to an equilibrium point where transaction costs are minimized and profits for the involved parties are maximized. However, opportunistic behavior can lead toward a hold-up problem when there are incentives for continuous collaboration. In this case, one party attempts to capture more of the economic rents from continuous collaboration than the other party, which pushes the market beyond the equilibrium point to a less efficient state. To date this has been studied in the context of U.S. firm bidding interactions. Yet research has demonstrated significant differences in the behavior of firms in different market economies. In this paper we replicate an empirical bidding simulation conducted in the U.S. to examine opportunistic behavior and the evolution of market efficiency in China. We conducted 18 internet-based interactive bidding simulations through which we recruited 157 participants from China. Each participant submitted bids on up to 10 projects during each of the internet-based interactive bidding simulations. We collected information on each participant’s bidding strategy and analyzed this information to understand how the market evolved with increasing experience. We then contrast the empirical findings from the U.S. experiment with the data we collected. The results demonstrate that opportunistic behavior can occur in China, but it differs from the U.S. in magnitude.