Strategic Bidding and Contract Renegotiation

Abstract

When firms bid in procurement auctions, they take into account the likelihood of future contract renegotiations. If they anticipate that certain input quantities will change ex post, they have an incentive to strategically skew their itemized bids, thereby increasing profits for themselves and costs for the procuring agency. We develop and estimate a structural model of strategic bidding using a data set of road construction projects in Vermont. We find that bidding strategies lead to increased markups for renegotiated items and reduced markups for nonrenegotiated items, results consistent with bid-skewing. * Manuscript

Bureaucratic Competence and Procurement Outcomes

“…See, for instance,Bajari and Lewis [2011] for delays, and Mohamed,Khoury and Hafez [2011],Iimi [2013],Bajari, Houghton and Tadelis [2014] andJung et al [2018] for cost overruns.3 The size of cost and time overruns also partly captures these huggling costs as, given the number of renegotiations, larger renegotiated values suggest a greater complexity of the renegotiated contract.4 It might also seem tautological that procurement outcomes correlate with a survey measure which is itself measuring opinions on an outcome -the overall quality of work done. But this would only be true if the respondents were to give prominence in their responses to procurement outcomes.…”

The impact of regional competition on the health care industry

“…This variable summarizes the competitiveness in the local market and is widely accepted in the empirical IO literature. Similar measures have been constructed in industries to identify a competitor's minimum distance to a work site, minimum worklog etc (for example see De Silva et al 2003, Bajari et al 2014, and Jung et al 2018. In our empirical analysis, we control for each referral hospital quality based on their scores on the report.…”

Specification and negotiation in incomplete contracts

“…Jung et al. () assumed that contractors form expectations about the future adjustments on each item based on the historical probability of revision and negotiation.…”

“…In comparison, Bajari, Houghton, and Tadelis (2014) and De Silva et al (2016) assumed that the contractors have rational expectation about the actual quantities to be used in the new design conditional on the contract being revised. Jung et al (2018) assumed that contractors form expectations about the future adjustments on each item based on the historical probability of revision and negotiation.…”