Understanding the Construction Winner’s Curse Using Game Theory

The winner’s curse is when the winning bidder submits an underestimated bid and is thus cursed by being selected to undertake the project. This paper uses game theory to identify the degree of the winner’s curse in two common construction bidding environments; namely, single-stage bidding and multi-stage bidding. The objective is to compare the aforementioned two construction bidding environments, and determine how learning from past bidding decisions and experiences can mitigate from the winner’s curse. To this end, the authors (1) presented the symmetric risk neutral Nash equilibrium (SRNNE) as an optimal bid function; (2) developed simulation models for single and multi-stage construction bidding processes; and (3) analyzed the results of the simulation models, which is based on an actual dataset of California Department of Transportation projects. This research demonstrated that the majority of general contractors and sub-contractors suffer from the winner’s curse in both single and multi-stage bidding environments, and that the SRNNE optimal bid function provides the contractors with a tool to avoid the winner’s curse problem and to consequently gain strategic positive profits in both bidding environments. This research should reduce the industry exposure to the effects of the winner’s curse in construction bidding.