Paper #1824

Title:

Competition under incomplete contracts and the design of procurement policies

Authors:

Rodrigo Carril, Andres Gonzalez-Lira and Michael S. Walker

Date:

March 2022

Abstract:

We study the effects of intensifying competition for contracts in the context of U.S. Defense procurement. Conceptually, opening contracts up to bids by more participants leads to lower awarding prices, but may hinder buyers' control over non-contractible characteristics of prospective contractors. Leveraging a regulation that mandates agencies to publicize certain contract opportunities, we document that expanding the set of bidders reduces award prices, but deteriorates post-award performance, resulting in more cost overruns and delays. To further study the scope of this tension, we develop and estimate a model in which the buyer endogenously chooses the intensity of competition, invited sellers decide on auction participation and bidding, and the winner executes the contract ex-post. Model estimates indicate substantial heterogeneity in ex-post performance across contractors, and show that simple adjustments to the current regulation that account for adverse selection could provide 2 percent of savings in procurement spending, or $104 million annually

Keywords:

Procurement, competition, auctions, incomplete contracts

JEL codes:

D22, D44, D73, H57, L13, L14

Area of Research:

Labour, Public, Development and Health Economics

Download the paper in PDF format