Public Sector Procurements and Reference Prices Estimation with Small Samples in Brazil

This paper presents a new and simple estimator for the reference prices of products or services. These reference prices aim to work as boundaries and support the public stakeholders’ decisions at the beginning of their procurements processes. We discuss the advantages of the method compared to the estimator traditionally used all over Brazil, especially in the Federal, State, and Municipal governments, which relies on the computation of averages of a few prices observed in each period. The proposed estimator decomposes the price of a product into a component of its economic sector, sector-time, supplier component representing differences in quality and productivity, and a product-specific component representing the average production-technology level of that product. With this procedure, it is unnecessary to collect the price of all known suppliers of a given product in the same month. This spawns more freedom to plan the interviews over the months, reducing data acquisition costs. To validate the new procedure, we implemented comparison tests between the adjustment of the proposed estimator (Economic) and the traditional (Statistical) to the data of real prices of inputs of the public construction sector in the country. Besides, we developed other tests based on a simulated environment where we know the actual market price and compare it with the two estimates given by the two estimators, calibrating the parameters with the ones observed in the data of real prices. Both tests showed that the proposed method performed better for every period in which not all existent suppliers of a product informed their prices. The Economic Estimator exhibited smaller variance and smaller absolute deviation to the market price.