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Presented By: Department of Economics

Applied Microeconomics | Industrial Organization: Competition under Incomplete Contracts and the Design of Procurement Policies

Andres Gonzalez-Lira, Yale University

econ umich econ umich
econ umich
We study the effects of intensifying competition for procurement contracts. Conceptually, opening contracts up to bids by more participants leads to lower acquisition costs. However, expanding the set of bidders hinders buyers' control over the quality of prospective contractors, potentially exacerbating adverse selection on non-contractible quality dimensions. We study this trade-off in the context of procurement by the U.S. Department of Defense. Our empirical strategy leverages regulation that mandates agencies to publicize contract opportunities whose value is expected to exceed a certain threshold. We find that advertising contract solicitations increases competition and leads to a different pool of selected vendors who, on average, offer lower prices. However, it also worsens post-award performance, resulting in more cost overruns and delays. This negative effect on post-award performance is driven by goods and services that are relatively complex, highlighting the role of contract incompleteness. To further study the scope of this tension, we develop and estimate a model in which the buyer chooses the extent of competition, and the invited sellers decide on auction participation and bidding. We estimate sellers' cost and ex-post quality distributions, as well as buyers' preference parameters over contract outcomes. Simulating equilibrium conditions under counterfactual settings, we benchmark the current regulation design with complexity-tailored publicity requirements, and find that adjustments to publicity requirements could provide savings of 2 percent of spending, or $104 million annually.

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October 8, 2021 (Friday) 10:00am
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