An Investigation of the Average Bid Mechanism for Procurement Auctions  Wei-Shiun Chang y Humboldt University Berlin Bo Chen z Southern Methodist University Timothy C. Salmon x Southern Methodist University October 2013 Abstract In a procurement context, it can be quite costly for a buyer when the winning seller underestimates the cost of a project and then defaults on the project midway through completion. The Average Bid Auction is one mechanism intended to help address this problem. This format involves awarding the contract to the bidder who has bid closest to the average of the bids submitted. We compare the performance of this mechanism with the standard Low Price mechanism to determine how successful the Average Bid format is in preventing bidder losses as well as its impact on the price paid by the buyer. We nd the Average Bid mechanism to be more successful than expected due to the surprising fact that bidding behavior remains similar between the Average Bid and Low Price auctions. We provide an explanation for the bidding behavior in the Average Bid auction that is based on subjects having problems processing signals near the extremes of the distribution. JEL Codes: C91, D44, D82 Key Words: Procurement auctions, average bid, bankruptcy, experiments 1 Introduction The use of auctions in the procurement process is a standard practice for many organiza- tions who are interested in using the competitive nature of auctions to keep procurement  The authors thank Francesco Decarolis, Dmitry Ryvkin, Svetlana Pevnitskaya, and Mark Issac for their advice and comments, and Tanapong Potipiti for helpful discussion on our simulations. We also thank various participants in presentations at Texas A&M University and the 2011 Tucson ESA meetings for helpful suggestions. Financial support for this project was provided by IFREE. y Humboldt University of Berlin, Institute for Entrepreneurial Studies and Innovation Management, Unter den Linden 6, 10099 Berlin, Germany. changwei@hu-berlin.de, Phone: +49 30209399013, Fax: +49 30 2093 99030. z Southern Methodist University, Department of Economics, 3300 Dyer Street, Suite 301 Umphrey Lee Center, Dallas, TX 75275-0496. bochen@smu.edu, Phone: 214-768-2715, Fax: 214-768-1821. x Southern Methodist University, Department of Economics, 3300 Dyer Street, Suite 301 Umphrey Lee Center, Dallas, TX 75275-0496. tsalmon@smu.edu, Phone: 214-768-3547, Fax: 214-768-1821. 1