Working Paper: NBER ID: w12051
Authors: Patrick Bajari; Stephanie Houghton; Steve Tadelis
Abstract: Procurement contracts are often incomplete because the initial plans and specifications are changed and refined after the contract is awarded to the lowest bidder. This results in a final cost to the buyer that differs from the low bid, and may also involve significant adaptation and renegotiation costs. We propose a stylized model of bidding for incomplete contracts and apply it to data from highway paving contracts. Reduced form regressions suggest that bidders respond strategically to contractual incompleteness and that adaptation costs, broadly defined, are an important determinant of the observed bids. We then estimate the costs of adaptation and bidder markups using a structural auction model. The estimates suggest that adaptation costs on average account for about ten percent of the winning bid. The distortions from private information and local market power, which are the focus on much of the literature on optimal procurement mechanisms, are much smaller by comparison.
Keywords: procurement contracts; bidding; adaptation costs; structural auction model
JEL Codes: D23; D82; H57; L14; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bidders expect deductions due to changes in scope (D44) | bids increase (D44) |
| discrepancies between initial bids and final payments (D44) | adaptation costs (Q52) |
| adaptation costs (Q52) | bidding behavior (D44) |
| contractual incompleteness (D86) | adaptation costs (Q52) |