An Econometric Identification of Abnormally Low Bids in Procurement Market: Discriminant Analysis

Jinook Jeong and Hyunwoo Lee
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Hyunwoo Lee: Yonsei University

No 2018rwp-129, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: In the public construction procurement market, 'abnormally low bids (ALB)' are prevalent and they cause many social and economic problems. Also, when the procurement bids are colluded, ALB make the competitive price systematically underestimated. As many countries regulate ALB, their criteria to identify ALB are not homogenous. Most of the criteria are based on construction cost, which is usually inaccurate, vulnerable to accounting manipulation, and limited to the supply side information of the market. We propose an econometric identification process of ALB using a discriminant analysis. It is based on a switching regression with incomplete separation information and easily estimable by MLE. Through a Monte Carlo simulation, we show that our new method works well. We apply our method to Korean public construction bidding data from 2007 to 2016. The estimation results identify the determinants of the bid prices, along with the determinants of ALB, and presents a more accurate assessment of the collusion damage.

Keywords: abnormally low bids; discriminant analysis; public procurement market (search for similar items in EconPapers)
JEL-codes: H57 L40 L70 (search for similar items in EconPapers)
Pages: 23pages
Date: 2018-10
New Economics Papers: this item is included in nep-com and nep-ecm
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Journal Article: An econometric identification of abnormally low bids in the procurement market: discriminant analysis (2024)
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