An analysis of competitive bidding by providers for indigent medical care contracts

This article develops a model of behavior in bidding for indigent medical care contracts in which bidders set bid prices to maximize their expected utility, conditional on estimates of variables which affect the payoff associated with winning or losing a contract. The hypotheses generated by this model are tested empirically using data from the first round of bidding in the Arizona indigent health care experiment. The behavior of bidding organizations in Arizona is found to be consistent in most respects with the predictions of the model. Bid prices appear to have been influenced by estimated costs and by expectations concerning the potential loss from not securing a contract, the initial wealth of the bidding organization, and the expected number of competitors in the bidding process.