IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v116y2026i2p535-81.html

Competition under Incomplete Contracts and the Design of Procurement Policies

Author

Listed:
  • Rodrigo Carril
  • Andres Gonzalez-Lira
  • Michael S. Walker

Abstract

We study the effects of intensifying competition for contracts in the context of US Defense procurement. Leveraging a discontinuous regulation that mandates agencies to publicize certain contract opportunities, we document that expanding the set of bidders reduces award prices but deteriorates post-award performance in terms of cost overruns and delays. We develop and estimate an auction model with endogenous entry and stochastic execution performance, in which the buyer endogenously chooses the intensity of competition. Model estimates indicate substantial heterogeneity in performance across contractors and show that simple adjustments to the current regulation could provide significant savings in procurement spending.

Suggested Citation

  • Rodrigo Carril & Andres Gonzalez-Lira & Michael S. Walker, 2026. "Competition under Incomplete Contracts and the Design of Procurement Policies," American Economic Review, American Economic Association, vol. 116(2), pages 535-581, February.
    • Handle: RePEc:aea:aecrev:v:116:y:2026:i:2:p:535-81
    DOI: 10.1257/aer.20221345
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/doi/10.1257/aer.20221345
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    File URL: https://doi.org/10.3886/E231127V1
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/materials/24558
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/materials/24559
    Download Restriction: no
    File URL: https://libkey.io/10.1257/aer.20221345?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Emmanuel Guerre & Isabelle Perrigne & Quang Vuong, 2000. "Optimal Nonparametric Estimation of First-Price Auctions," Econometrica, Econometric Society, vol. 68(3), pages 525-574, May.
    2. Patrick Bajari, 2001. "Comparing competition and collusion: a numerical approach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(1), pages 187-205.
    3. Erica Bosio & Simeon Djankov & Edward Glaeser & Andrei Shleifer, 2022. "Public Procurement in Law and Practice," American Economic Review, American Economic Association, vol. 112(4), pages 1091-1117, April.
    4. Ottorino Chillemi & Claudio Mezzetti, 2014. "Optimal procurement mechanisms: bidding on price and damages for breach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(2), pages 335-355, February.
    5. Alexander MacKay, 2022. "Contract Duration and the Costs of Market Transactions," American Economic Journal: Microeconomics, American Economic Association, vol. 14(3), pages 164-212, August.
    6. Oriana Bandiera & Andrea Prat & Tommaso Valletti, 2009. "Active and Passive Waste in Government Spending: Evidence from a Policy Experiment," American Economic Review, American Economic Association, vol. 99(4), pages 1278-1308, September.
    7. Davezies, Laurent & Le Barbanchon, Thomas, 2017. "Regression discontinuity design with continuous measurement error in the running variable," Journal of Econometrics, Elsevier, vol. 200(2), pages 260-281.
    8. Burguet, Roberto & Ganuza, Juan-José & Hauk, Esther, 2012. "Limited liability and mechanism design in procurement," Games and Economic Behavior, Elsevier, vol. 76(1), pages 15-25.
    9. Jeffrey B. Liebman & Neale Mahoney, 2017. "Do Expiring Budgets Lead to Wasteful Year-End Spending? Evidence from Federal Procurement," American Economic Review, American Economic Association, vol. 107(11), pages 3510-3549, November.
    10. Elena Krasnokutskaya, 2011. "Identification and Estimation of Auction Models with Unobserved Heterogeneity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(1), pages 293-327.
    11. Elodie Guerre & I. Perrigne & Q.H. Vuong, 2000. "Optimal nonparametric estimation of first-price auctions [[Estimation nonparamétrique optimale des enchères au premier prix]]," Post-Print hal-02697497, HAL.
    12. Gregory Lewis & Patrick Bajari, 2011. "Procurement Contracting With Time Incentives: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(3), pages 1173-1211.
    13. Quang Vuong & Sandra Campo & Isabelle Perrigne, 2003. "Asymmetry in first-price auctions with affiliated private values," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(2), pages 179-207.
    14. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-194, March.
    15. Isaiah Andrews & Matthew Gentzkow & Jesse M. Shapiro, 2017. "Measuring the Sensitivity of Parameter Estimates to Estimation Moments," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(4), pages 1553-1592.
    16. John Asker & Estelle Cantillon, 2008. "Properties of scoring auctions," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 69-85, March.
    17. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-599, June.
    18. Alan I. Barreca & Melanie Guldi & Jason M. Lindo & Glen R. Waddell, 2011. "Saving Babies? Revisiting the effect of very low birth weight classification," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(4), pages 2117-2123.
    19. Giuseppe Lopomo & Nicola Persico & Alessandro T. Villa, 2023. "Optimal Procurement with Quality Concerns," American Economic Review, American Economic Association, vol. 113(6), pages 1505-1529, June.
    20. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
    21. Philip A Haile & Yuichi Kitamura, 2019. "Unobserved heterogeneity in auctions," The Econometrics Journal, Royal Economic Society, vol. 22(1), pages 1-19.
    22. Sebastian Calonico & Matias D. Cattaneo & Rocio Titiunik, 2014. "Robust Nonparametric Confidence Intervals for Regression‐Discontinuity Designs," Econometrica, Econometric Society, vol. 82, pages 2295-2326, November.
    23. Michael Carlos Best & Jonas Hjort & David Szakonyi, 2023. "Individuals and Organizations as Sources of State Effectiveness," American Economic Review, American Economic Association, vol. 113(8), pages 2121-2167, August.
    24. Nicholas Ryan, 2020. "Contract Enforcement and Productive Efficiency: Evidence From the Bidding and Renegotiation of Power Contracts in India," Econometrica, Econometric Society, vol. 88(2), pages 383-424, March.
    25. Manelli, Alejandro M & Vincent, Daniel R, 1995. "Optimal Procurement Mechanisms," Econometrica, Econometric Society, vol. 63(3), pages 591-620, May.
    26. Tong Li & Xiaoyong Zheng, 2009. "Entry and Competition Effects in First-Price Auctions: Theory and Evidence from Procurement Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(4), pages 1397-1429.
    27. David S. Lee & Thomas Lemieux, 2010. "Regression Discontinuity Designs in Economics," Journal of Economic Literature, American Economic Association, vol. 48(2), pages 281-355, June.
    28. James W. Roberts, 2013. "Unobserved heterogeneity and reserve prices in auctions," RAND Journal of Economics, RAND Corporation, vol. 44(4), pages 712-732, December.
    29. McFadden, Daniel, 1989. "A Method of Simulated Moments for Estimation of Discrete Response Models without Numerical Integration," Econometrica, Econometric Society, vol. 57(5), pages 995-1026, September.
    30. Porter, Robert H & Zona, J Douglas, 1993. "Detection of Bid Rigging in Procurement Auctions," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 518-538, June.
    31. Vivek Bhattacharya & James W. Roberts & Andrew Sweeting, 2014. "Regulating bidder participation in auctions," RAND Journal of Economics, RAND Corporation, vol. 45(4), pages 675-704, December.
    32. Henrik J. Kleven & Mazhar Waseem, 2013. "Using Notches to Uncover Optimization Frictions and Structural Elasticities: Theory and Evidence from Pakistan," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(2), pages 669-723.
    33. Samuelson, William F., 1985. "Competitive bidding with entry costs," Economics Letters, Elsevier, vol. 17(1-2), pages 53-57.
    34. Spagnolo, Giancarlo & Calzolari, Giacomo, 2009. "Relational Contracts and Competitive Screening," CEPR Discussion Papers 7434, C.E.P.R. Discussion Papers.
    35. José‐Antonio Espín‐Sánchez & Álvaro Parra & Yuzhou Wang, 2023. "Equilibrium uniqueness in entry games with private information," RAND Journal of Economics, RAND Corporation, vol. 54(3), pages 512-540, September.
    36. Matias D. Cattaneo & Luke Keele & Rocio Titiunik, 2021. "Covariate Adjustment in Regression Discontinuity Designs," Papers 2110.08410, arXiv.org, revised Aug 2022.
    37. Zhuan Pei & Yi Shen, 2017. "The Devil is in the Tails: Regression Discontinuity Design with Measurement Error in the Assignment Variable," Advances in Econometrics, in: Regression Discontinuity Designs, volume 38, pages 455-502, Emerald Group Publishing Limited.
    38. Lebrun, Bernard, 1999. "First Price Auctions in the Asymmetric N Bidder Case," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 125-142, February.
    39. Athey, Susan, 2001. "Single Crossing Properties and the Existence of Pure Strategy Equilibria in Games of Incomplete Information," Econometrica, Econometric Society, vol. 69(4), pages 861-889, July.
    40. Matias D. Cattaneo & Rocío Titiunik, 2022. "Regression Discontinuity Designs," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 821-851, August.
    41. Timothy G. Conley & Francesco Decarolis, 2016. "Detecting Bidders Groups in Collusive Auctions," American Economic Journal: Microeconomics, American Economic Association, vol. 8(2), pages 1-38, May.
    42. Pakes, Ariel & Pollard, David, 1989. "Simulation and the Asymptotics of Optimization Estimators," Econometrica, Econometric Society, vol. 57(5), pages 1027-1057, September.
    43. François Gerard & Miikka Rokkanen & Christoph Rothe, 2020. "Bounds on treatment effects in regression discontinuity designs with a manipulated running variable," Quantitative Economics, Econometric Society, vol. 11(3), pages 839-870, July.
    44. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
    45. Coviello, Decio & Mariniello, Mario, 2014. "Publicity requirements in public procurement: Evidence from a regression discontinuity design," Journal of Public Economics, Elsevier, vol. 109(C), pages 76-100.
    46. Spulber, Daniel F, 1990. "Auctions and Contract Enforcement," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 6(2), pages 325-344, Fall.
    47. Sweeting, Andrew & Bhattacharya, Vivek, 2015. "Selective entry and auction design," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 189-207.
    48. Raj Chetty & John N. Friedman & Emmanuel Saez, 2013. "Using Differences in Knowledge across Neighborhoods to Uncover the Impacts of the EITC on Earnings," American Economic Review, American Economic Association, vol. 103(7), pages 2683-2721, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andres Gonzalez-Lira & Michael S. Walker & Rodrigo Carril, 2022. "Competition under Incomplete Contracts and the Design of Procurement Policies," Working Papers 1327, Barcelona School of Economics.
    2. Lorentziadis, Panos L., 2016. "Optimal bidding in auctions from a game theory perspective," European Journal of Operational Research, Elsevier, vol. 248(2), pages 347-371.
    3. Rodrigo Carril, 2021. "Rules Versus Discretion in Public Procurement," Working Papers 1232, Barcelona School of Economics.
    4. Jääskeläinen, Jan & Tukiainen, Janne, 2019. "Anatomy of public procurement," Working Papers 118, VATT Institute for Economic Research.
    5. Giovanni Compiani & Philip Haile & Marcelo Sant’Anna, 2020. "Common Values, Unobserved Heterogeneity, and Endogenous Entry in US Offshore Oil Lease Auctions," Journal of Political Economy, University of Chicago Press, vol. 128(10), pages 3872-3912.
    6. Robert Clark & Decio Coviello & Jean-Fran�ois Gauthier & Art Shneyerov, 2018. "Bid Rigging and Entry Deterrence in Public Procurement: Evidence from an Investigation into Collusion and Corruption in Quebec," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 34(3), pages 301-363.
    7. S meyra Atmaca, 2020. "Application Period in Reverse Auctions," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 20/993, Ghent University, Faculty of Economics and Business Administration.
    8. Decio Coviello & Andrea Guglielmo & Giancarlo Spagnolo, 2015. "The Effect of Discretion on Procurement Performance," CEIS Research Paper 361, Tor Vergata University, CEIS, revised 17 Nov 2015.
    9. Sweeting, Andrew & Bhattacharya, Vivek, 2015. "Selective entry and auction design," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 189-207.
    10. Decio Coviello & Andrea Guglielmo & Giancarlo Spagnolo, 2018. "The Effect of Discretion on Procurement Performance," Management Science, INFORMS, vol. 64(2), pages 715-738, February.
    11. Nakabayashi, Jun, 2013. "Small business set-asides in procurement auctions: An empirical analysis," Journal of Public Economics, Elsevier, vol. 100(C), pages 28-44.
    12. Ari Hyytinen & Sofia Lundberg & Otto Toivanen, 2018. "Design of public procurement auctions: evidence from cleaning contracts," RAND Journal of Economics, RAND Corporation, vol. 49(2), pages 398-426, June.
    13. Clark, Robert & Coviello, Decio & Gauthier, Jean-Francois & Shneyerov, Art, 2018. "Evidence from an investigation into collusion and corruption in Quebec," Queen's Economics Department Working Papers 274727, Queen's University - Department of Economics.
    14. Yu-Chin Hsu & Tong Li & Chu-An Liu & Hidenori Takahashi, 2026. "Testing for Monotone Equilibrium Strategies in Games of Incomplete Information," Papers 2604.06643, arXiv.org.
    15. Gabrielli, M. Florencia & Willington, Manuel, 2023. "Estimating damages from bidding rings in first-price auctions," Economic Modelling, Elsevier, vol. 126(C).
    16. Aryal, Gaurab & Grundl, Serafin & Kim, Dong-Hyuk & Zhu, Yu, 2018. "Empirical relevance of ambiguity in first-price auctions," Journal of Econometrics, Elsevier, vol. 204(2), pages 189-206.
    17. Hill, Jonathan B. & Shneyerov, Artyom, 2013. "Are there common values in first-price auctions? A tail-index nonparametric test," Journal of Econometrics, Elsevier, vol. 174(2), pages 144-164.
    18. Joris Pinkse & Karl Schurter, 2019. "Estimation of Auction Models with Shape Restrictions," Papers 1912.07466, arXiv.org.
    19. Hickman Brent R. & Hubbard Timothy P. & Sağlam Yiğit, 2012. "Structural Econometric Methods in Auctions: A Guide to the Literature," Journal of Econometric Methods, De Gruyter, vol. 1(1), pages 67-106, August.
    20. Chen, Qianmiao, 2025. "Rigging the Scores : Corruption through Scoring Rule Manipulation in Public Procurement Auctions," Policy Research Working Paper Series 11267, The World Bank.

    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:116:y:2026:i:2:p:535-81. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.