Competition in the Outsourced Chief Investment Officer Market: A Game Theory Approach

This study analyzes the competition in the outsourced chief investment officer (OCIO) market by utilizing a game-theory approach of multidimensional auctions, which is theoretically identical to the procurement auction system of OCIO selection. Depending on how the OCIO manages the fund, we analyze auctions using two distinct cases. In the first case, the OCIO operates a designated organization for each fund. This case leads to the conclusion that it is difficult for small funds to use OCIO services because of the high operational costs. In the second case, the OCIO manages multiple funds collectively, enabling even small funds to use OCIO services. Korea’s OCIO market currently operates according to the premise of the first case, meaning that small private funds are not likely to use the service even if a fund-type retirement pension is introduced. Thus, our conclusion implies that in the current OCIO structure, it is difficult for the Korean OCIO market to grow significantly. Policies and institutional supplementation are required.

“Now or Later?” When to Deploy Qualification Screening in Open-Bid Auction for Re-Sourcing

Designing Open-bid Procurement Auction with Supplier Qualification Screenings Manufacturers often use re-sourcing initiatives to keep their suppliers’ pricing competitive; e.g., new entrant suppliers are identified and invited to compete with the incumbent supplier for supply contracts in an open-bid auction. To ensure that entrant suppliers have the capability of executing the contract, the conventional approach for many manufacturers is to conduct qualification screenings on all the entrants prior to auction bidding and only allow qualified entrant suppliers to compete in the auction. In “‘Now or Later?’ When to Deploy Qualification Screening in Open-Bid Auction for Re-Sourcing”, Zhang, Chen, and Katok explore an alternative arrangement of this process where all entrant suppliers are invited for bidding first before qualification screenings are selectively conducted afterward to determine the contract winner. This new approach helps reduce the waste of manufacturers’ screening efforts on suppliers with uncompetitive bids but in the meantime introduces incentives for less competitive supplier bidding behavior. They provide analytical and numerical evidence that this new approach could be very effective in managing manufacturers’ procurement costs.

Accountability to Contain Corruption in Procurement Tenders

This article addresses the issue of favoritism at the design stage of a complex procurement auction. A community of citizens procures a project but lacks the ability to translate its preferences into operational technical specifications. This task is delegated to a public officer who may collude with one of the firms in exchange of a bribe. We investigate a simple accountability mechanism that requires justifying one aspect of the technical decision determined by the alerts of competitors (alert-based accountability [ABA]). We find that relying on competitors enables the community to deter favoritism significantly more easily than random challenges. The penalty needed to fully deter corruption is independent of the complexity of the project. It depends on the degree of differentiation within the industry. In an illustrative example, we study the patterns of favoritism when corruption occurs under ABA and compare them with the patterns in the random challenge mechanism. (JEL D73, D82, H57).

The Presence and Effect of the Winner's Curse in the Market for Audit Services: An Experimental Market Examination

ABSTRACT We argue that the market for audit services resembles a common value procurement auction in that there is common uncertainty regarding audit cost and auditors generate a private estimate of cost prior to quoting a price. We examine two audit markets that take this form of market institution. First, we examine a simple market setting where auditors determine only price and interact with robot clients. Next, we examine an enriched market setting that incorporates theoretically important features of the market for audit services. We find that auditors in the simple audit market learn to avoid the winner's curse with pricing experience but this learning effect is hindered in the enriched market. Auditors in the enriched market reduce audit effort when they suffer the winner's curse. Our evidence suggests that low balling can occur due to the winner's curse, and this source of low balling poses a threat to audit quality.