Productivity in Procurement Auctions of Pavement Contracts in Mexico

When it comes to allocating contracts, governments must weigh the decision of whether to exercise discretion in hiring or to allow for greater competition without firm selection. It is not always clear which allocation format will lead to better outcomes. This trade-off is influenced by the government’s ability to select the best firms when competition is restricted, as well as the likelihood that this practice will lead to corruption. In this paper, I examine the allocation of street pavement contracts in Mexico. By combining auction methods with a productivity analysis, I am able to indirectly analyze whether local governments select firms with low excess costs when competition is restricted. This indirect approach allows for monitoring contract allocation in situations where there is limited information available on firm reputation. I find that firms selected for settings with less competition have lower costs for complex pavement contracts, but higher costs for simple ones. These results suggest that the government would benefit from using public auctions for simple pavement contracts, which is the opposite of current practices.