Subcontracting and competitive bidding on incomplete procurement contracts

Daniel Miller

RAND Journal of Economics, 2014, vol. 45, issue 4, 705-746

Abstract: type="main">

This article examines the impact of incomplete contracts on subcontracting and the design of procurement auctions. I estimate the effect of ex post contract revisions on unit costs for both subcontracted and in-house performed work items on bridge projects procured by the California Department of Transportation. I model a scoring auction showing how ex post revisions skew bidding decisions and estimate unit costs from bid data using the method of sieve estimation. The results highlight the cost implications of incomplete contracting frictions, subcontracting decisions, and bidding distortions. In conclusion, I propose alternative auction mechanisms that could improve outcomes.

Date: 2014
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