Optimal mechanism for project splitting with time cost and asymmetric information

Abstract

In practice, most owners are sensitive to construction-project duration. Thus, to complete a project quickly, they like to divide a project into many sections before bidding and award them to different constructors. However, such division makes achieving optimality complicated because of information asymmetry (i.e., owners cannot fully understand the costs of potential constructors before bidding). To solve this problem, this study proposes an optimal mechanism that can generate the optimal section number, selection of constructors, section allocation, and constructors' payment. We observe that our mechanism always splits the project evenly among all winning constructors. In addition, the optimal number of sections relies upon the trade-off between time and construction costs. Under this mechanism, the payment to each constructor is equal to its virtual construction cost multiplied by its share. As a result, when winners are multiple, the higher the construction cost of a winner, the higher his payment and information rent is. That is, the owner can achieve price discrimination in terms of payment, and winners’ curse occurs in terms of information rent. Furthermore, the lower the construction cost of a winner, the more significant such curse is. Compared to the case of symmetric information, asymmetric information increases the price discrimination degree but decreases the optimal number of project sections. This study expands the existing project-bidding mechanism from the exogenous number of project sections to the endogenous number of sections scenario.