Competition under Incomplete Contracts and the Design of Procurement Policies

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

No 1327, Working Papers from Barcelona School of Economics

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: competition; auctions; Procurement; incomplete contracts (search for similar items in EconPapers)
JEL-codes: D22 D44 D73 H57 L13 L14 (search for similar items in EconPapers)
Date: 2022-03
New Economics Papers: this item is included in nep-com and nep-des
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Working Paper: Competition under incomplete contracts and the design of procurement policies (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:1327

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