Set-Asides and Subsidies in Auctions

A new working paper (gated version here) by Susan Athey, Dominic Coey, and Jonathan Levin examines the effects of set-asides and subsidies in auctions.

ABSTRACT
Set-asides and subsidies are used extensively in government procurement and natural resource sales. We analyze these policies in an empirical model of U.S. Forest Service timber auctions. The model fits the data well both within the sample of unrestricted sales where we estimate the model, and when we predict (out of sample) bidder entry and prices for small business set-asides. Our estimates suggest that restricting entry to small businesses substantially reduces efficiency and revenue, although it does increase small business participation. An alternative policy of subsidizing small bidders would increase revenue and small bidder profit, while eliminating almost all of the efficiency loss of set-asides, and only slightly decreasing the profit of larger firms. We explain these findings by connecting to the theory of optimal auction design.

SELF SERVING UPDATE: We find that designating a sale as a set-aside reduced e¢ ciency by 17% and cost the Forest Service about 5% in revenue. FOOTNOTE{Brannman and Froeb's paper, which looks at Forest Service timber auctions, is particularly interesting because although the approach is quite different from ours (they do not consider bidder participation, use di§erent data, and consider a logit value model of second price auctions), they reach a similar conclusion about the revenue e§ect of the Forest Service set-aside program.}