Competition in public procurement auctions in the water supply and sanitation sector is largely limited. This is partly because of high technical complexity and partly because of auction design flaws. The division of lot contracts is an important policy choice for auctioneers to achieve efficiency. In general, there is a tradeoff between competition in auctions and size of contracts. Larger works could benefit from economies of scale and scope, but, large contracts might undermine competition. With the data on public procurement auctions for water and sewage projects in developing countries, it is shown that the bidder entry is crucially endogenous, especially determined by the auctioneer’s bundling and unbundling strategy. If water treatment plant and distribution network works are bundled in a single lot package, competition would be significantly reduced, and this adverse entry effect would in turn raise public procurement costs of infrastructure. There is no evidence of positive scope economies in the bidder cost structure. It is important to account for the underlying cost structure for designing efficient auction mechanisms.
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Paper provided by Université Libre de Bruxelles, Ecares in its series ECARES Working Papers with number
2009_007.
Find related papers by JEL classification: D44 - Microeconomics - - Market Structure and Pricing - - - Auctions H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
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