RT Generic
T1 Persistent markups in bidding markets with financial constraints
A1 Beker, Pablo F.
A1 Hernando-Veciana, Ángel
A2 Universidad Carlos III de Madrid. Departamento de Economía, 
AB This paper studies the impact of financial constraints on the persistency of highmarkups in a class of markets, including public procurement, known by practitioners asbidding markets. We develop an infinite horizon model in which two firms optimallyreinvest working capital and bid for a procurement contract each period. Working capitalis constrained by the firm's cash from previous period and some exogenous cash flow, itis costly and it increases the set of acceptable bids. We argue that the latter is a naturalconsequence of the presence of progress payments or the existence of moral hazard. Wesay that the firm is (severely) financially constrained if its working capital is such that onlybids (substantially) above production cost are acceptable. We show that markups arepositive (high) if and only if one firm is (severely) financially constrained. Our main resultis that markups are persistently high because one firm is severely financially constrainedmost of the time.
SN 2340-5031
YR 2011
FD 2011-10-26
LK http://hdl.handle.net/10016/12410
UL http://hdl.handle.net/10016/12410
LA eng
DS e-Archivo
RD 28 abr. 2024