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Cost Overrun and Auction Format in Public Works

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Author Info

  • Alessandro Bucciol

    ()
    (University of Verona & University of Amsterdam)

  • Ottorino Chillemi

    ()
    (University of Padova)

  • Giacomo Palazzi

    ()
    (University of Padova)

Abstract

We provide an empirical investigation of cost overruns in small public procurement projects, using a panel dataset of auctions held in the Italian Veneto region between 2004 and 2006. We use this sample to study the effect on cost overruns of auction formats (average bid as opposed to first price rule) conditional on the entry mechanisms (free as opposed to limited access). It is commonly believed that cost overruns are lower under average bid auctions relative to first price auctions. We find support to this belief only when access to the auction is limited. We interpret this finding as evidence that winner's adverse selection is an important problem in auctions for small size public works, and the lack of a significant effect of the average bid format in free entry auctions may reflect collusion.

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Bibliographic Info

Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0129.

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Length: 15 pages
Date of creation: Mar 2011
Date of revision:
Handle: RePEc:pad:wpaper:0129

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Keywords: cost overrun; average bid; first price; free entry; work delays.;

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  1. Patrick Bajari & Robert S. McMillan & Steve Tadelis, 2003. "Auctions Versus Negotiations in Procurement: An Empirical Analysis," NBER Working Papers 9757, National Bureau of Economic Research, Inc.
  2. Aleix Calveras & Juan-Jose Ganuza & Esther Hauk, 2004. "Wild Bids. Gambling for Resurrection in Procurement Contracts," Journal of Regulatory Economics, Springer, vol. 26(1), pages 41-68, 07.
  3. Spagnolo, Giancarlo & Albano, Gian Luigi & Bianchi, Milo, 2006. "Bid avarage methods in Procurement," MPRA Paper 8997, University Library of Munich, Germany.
  4. Waehrer Keith, 1995. "A Model of Auction Contracts with Liquidated Damages," Journal of Economic Theory, Elsevier, vol. 67(2), pages 531-555, December.
  5. Francesco Decarolis, 2009. "When the highest bidder loses the auction: theory and evidence from public procurement," Temi di discussione (Economic working papers) 717, Bank of Italy, Economic Research and International Relations Area.
  6. Simon Board, 2007. "Bidding into the Red: A Model of Post-Auction Bankruptcy," Journal of Finance, American Finance Association, vol. 62(6), pages 2695-2723, December.
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Cited by:
  1. Luigi Moretti & Paola Valbonesi, 2012. "Subcontracting in Public Procurement: An Empirical Investigation," "Marco Fanno" Working Papers 0154, Dipartimento di Scienze Economiche "Marco Fanno".

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