Price Adjustment Policies in Procurement Contracting: An Analysis of Bidding Behavior

Georgia Kosmopoulou and Xueqi Zhou

Journal of Industrial Economics, 2014, vol. 62, issue 1, 77-112

Abstract: type="main">

The fluctuations in fuel prices over the past decade led a number of government agencies to introduce price adjustment clauses in procurement contracting. Those clauses were primarily designed to reduce contractors’ uncertainty without considering the impact of such initiatives on bidding and the budget. We analyze a newly constructed, detailed panel of observations on bids for construction contracts and compare bidding behavior across periods and projects, and across items within projects. Estimates from a difference-in-differences approach, indicate that bidding becomes more aggressive and less dispersed after the implementation of this policy. The difference is more pronounced when we consider itemized bids than overall project bids. Alternative techniques of regression discontinuity and nonparametric estimation are applied and yield consistent results.

Date: 2014
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