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Cost overrun and auction format in small size public works

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  • Bucciol, Alessandro
  • Chillemi, Ottorino
  • Palazzi, Giacomo

Abstract

We study the effect on cost overruns of two different auction formats, the first price sealed bid and the average bid, conditional on whether entry is open or restricted. The first price format awards the contract to the lowest bid, while the average bid format awards the contract to the bid closest to the average of all the bids. This latter format is supposed to prevent an unreliable low bidder from winning the auction; as a consequence cost overruns should be lower under the average bid than under the first price format. We test this hypothesis with a panel data set of auctions held in the Italian Veneto region between 2004 and 2006, including small size public projects in sectors such as road works and building maintenance. We find that cost overruns are lower under the average bid format, but only when the entry is restricted. We then speculate on possible explanations for this result.

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Bibliographic Info

Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 30 (2013)
Issue (Month): C ()
Pages: 35-42

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Handle: RePEc:eee:poleco:v:30:y:2013:i:c:p:35-42

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Web page: http://www.elsevier.com/locate/inca/505544

Related research

Keywords: Cost overrun; Average bid; First price; Open entry;

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References

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  1. Juan-Jos� Ganuza, 2007. "COMPETITION AND COST OVERRUNS IN PROCUREMENT -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 55(4), pages 633-660, December.
  2. Francesco Decarolis & Cristina Giorgiantonio & Valentina Giovanniello, 2010. "The awarding of public works in Italy: an analysis of the mechanisms for the selection of contractors," Questioni di Economia e Finanza (Occasional Papers) 83, Bank of Italy, Economic Research and International Relations Area.
  3. Aleix Calveras & Juan J. Ganuza & Esther Hauk, 2001. "Wild bids. Gambling for resurrection in procurement contracts," Economics Working Papers 553, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2001.
  4. Evenett, Simon J. & Hoekman, Bernard M., 2005. "Government procurement: market access, transparency, and multilateral trade rules," European Journal of Political Economy, Elsevier, vol. 21(1), pages 163-183, March.
  5. Gian Luigi Albano & Milo Bianchi & Giancarlo Spagnolo, 2006. "Bid Average Methods in Procurement," Rivista di Politica Economica, SIPI Spa, SIPI Spa, vol. 96(1), pages 41-62, January-F.
  6. Waehrer Keith, 1995. "A Model of Auction Contracts with Liquidated Damages," Journal of Economic Theory, Elsevier, vol. 67(2), pages 531-555, December.
  7. Odeck, James, 2004. "Cost overruns in road construction--what are their sizes and determinants?," Transport Policy, Elsevier, vol. 11(1), pages 43-53, January.
  8. Zheng, Charles Z., 2001. "High Bids and Broke Winners," Journal of Economic Theory, Elsevier, vol. 100(1), pages 129-171, September.
  9. Francesco Decarolis, 2009. "When the highest bidder loses the auction: theory and evidence from public procurement," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 717, Bank of Italy, Economic Research and International Relations Area.
  10. Bent Flyvbjerg & Mette K. Skamris holm & S�ren L. Buhl, 2003. "How common and how large are cost overruns in transport infrastructure projects?," Transport Reviews, Taylor & Francis Journals, vol. 23(1), pages 71-88, January.
  11. Spulber, Daniel F, 1990. "Auctions and Contract Enforcement," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 6(2), pages 325-44, Fall.
  12. Simon Board, 2007. "Bidding into the Red: A Model of Post-Auction Bankruptcy," Journal of Finance, American Finance Association, American Finance Association, vol. 62(6), pages 2695-2723, December.
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Cited by:
  1. Chiara D’Alpaos & Michele Moretto & Paola Valbonesi & Sergio Vergalli, 2012. "Time Overruns as Opportunistic Behavior in Public Procurement," Working Papers 2012.78, Fondazione Eni Enrico Mattei.
  2. Decio Coviello & Luigi Moretti & Giancarlo Spagnolo & Paola Valbonesi, 2013. "Court Efficiency and Procurement Performance," "Marco Fanno" Working Papers 0164, Dipartimento di Scienze Economiche "Marco Fanno".

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