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Subcontracting in Public Procurement: An Empirical Investigation

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Author Info

  • Luigi Moretti

    ()
    (University of Padova)

  • Paola Valbonesi

    ()
    (University of Padova)

Abstract

We have assembled a new dataset and we have empirically investigated the effects of subcontracting on the bidding price in auctions for the awarding of public contracts in Italy. The required qualification for firms aiming to bid for Italian public contracts determines different subcontracting formats: according to this system, bidding firms can be classified as either partially or fully qualified to complete a tendered project. The former are obliged to allocate certain tasks involved in the contract to other qualified firms, giving rise to a ÒmandatoryÓ subcontracting. The latter are free to choose whether or not to subcontract some tasks to similarly qualified firms, adopting an ÒoptionalÓ subcontracting. We find that firms in a position to choose whether to subcontract or not generally offer lower prices than those firms which must proceed with mandatory subcontracts. This result, which holds true after controlling for auction characteristics, firmsÕ fixed effects, and characteristics of the subcontract, indicates that firms apply different prices to different subcontracting strategies in the public procurement supply chain.

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Bibliographic Info

Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0154.

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Length: 33 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:pad:wpaper:0154

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Related research

Keywords: regulations for subcontracting in procurement; firmÕs supply chain strategy; public procurement; horizontal (and vertical) subcontracting.;

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References

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  1. Gregory Lewis & Patrick Bajari, 2011. "Procurement Contracting With Time Incentives: Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 126(3), pages 1173-1211.
  2. Gil, Ricard & Marion, Justin, 2009. "The Role of Repeated Interactions, Self-Enforcing Agreements and Relational [Sub]Contracting: Evidence from California Highway Procurement Auctions," University of California Transportation Center, Working Papers qt6ds5d1pp, University of California Transportation Center.
  3. Spagnolo, Giancarlo, 2012. "Reputation, Competition, and Entry in Procurement," SITE Working Paper Series 14, Stockholm Institute of Transition Economics, Stockholm School of Economics.
  4. Elena Krasnokutskaya & Katja Seim, 2011. "Bid Preference Programs and Participation in Highway Procurement Auctions," American Economic Review, American Economic Association, vol. 101(6), pages 2653-86, October.
  5. Patrick Bajari & Robert McMillan & Steven Tadelis, . "Auctions versus Negotiations in Procurement: An Empirical Analysis," Working Papers 02007, Stanford University, Department of Economics.
  6. Coviello, Decio & Gagliarducci, Stefano, 2010. "Building Political Collusion: Evidence from Procurement Auctions," IZA Discussion Papers 4939, Institute for the Study of Labor (IZA).
  7. Decio Coviello & Mario Mariniello, 2010. "The Role of Publicity Requirements on Entry and Auctions Outcomes," CEIS Research Paper 180, Tor Vergata University, CEIS, revised 21 Dec 2010.
  8. Riordan, Michael H & Sappington, David E M, 1987. "Information, Incentives, and Organizational Mode," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 243-63, May.
  9. Vincenzo Verardi & Christophe Croux, 2009. "Robust regression in Stata," Stata Journal, StataCorp LP, vol. 9(3), pages 439-453, September.
  10. Alper Atamtürk & Dorit S. Hochbaum, 2001. "Capacity Acquisition, Subcontracting, and Lot Sizing," Management Science, INFORMS, vol. 47(8), pages 1081-1100, August.
  11. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February.
  12. 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.
  13. Jan A. Van Mieghem, 1999. "Coordinating Investment, Production, and Subcontracting," Management Science, INFORMS, vol. 45(7), pages 954-971, July.
  14. Alessandro Bucciol & Ottorino Chillemi & Giacomo Palazzi, 2011. "Cost Overrun and Auction Format in Public Works," "Marco Fanno" Working Papers 0129, Dipartimento di Scienze Economiche "Marco Fanno".
  15. Sascha O. Becker & Andrea Ichino, 2002. "Estimation of average treatment effects based on propensity scores," Stata Journal, StataCorp LP, vol. 2(4), pages 358-377, November.
  16. Dakshina G De Silva & Timothy Dunne & Georgia Kosmopoulou & Carlos Lamarche, 2011. "Disadvantaged business enterprise goals in government procurement contracting: an analysis of bidding behavior and costs," Working Paper 1102, Federal Reserve Bank of Cleveland.
  17. Justin Marion, 2009. "How Costly Is Affirmative Action? Government Contracting and California's Proposition 209," The Review of Economics and Statistics, MIT Press, vol. 91(3), pages 503-522, August.
  18. Gale, Ian L & Hausch, Donald B & Stegeman, Mark, 2000. "Sequential Procurement with Subcontracting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(4), pages 989-1020, November.
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