Beker, Pablo and Hernando-Veciana, Ángel (2011) Persistent markups in bidding markets with financial constraints. Working Paper. Madrid: Universidad Carlos III de Madrid. Departamento de Economía. (Economic series. Working papers, Vol.2011).

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Abstract

This paper studies the impact of financial constraints on the persistency of high markups in a class of markets, including most of public procurement, known by practitioners as bidding markets. We develop an infinite horizon model in which two firms optimally reinvest working capital and bid for a procurement contract each period. Working capital is constrained by the firm’s cash from previous period and some exogenous cash flow, it is costly and it increases the set of acceptable bids. The latter is because the risk of non-compliance means that only bids that have secured financing are acceptable and less profitable bids have access to less external financing. We say that the firm is (severely) financially constrained if its working capital is such that only bids (substantially) above production cost are acceptable. We show that markups are positive (high) if and only if one firm is (severely) financially constrained. Our main result is that markups are persistently high because one firm is severely financially constrained most of the time.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Government purchasing -- Econometric models, Markup
Series Name:	Economic series. Working papers
Publisher:	Universidad Carlos III de Madrid. Departamento de Economía
Place of Publication:	Madrid
Date:	26 October 2011
Volume:	Vol.2011
Number:	No.33
Identification Number:	we1133
Institution:	University of Warwick
Status:	Not Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Open Access
Funder:	Fundación Ramón Areces, Spain. Ministerio de Ciencia e Innovación (MICINN)
Grant number:	ECO2009-10531 (MICINN)
Related URLs:	Other Repository
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URI:	http://wrap.warwick.ac.uk/id/eprint/42125

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