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Procurement Contracting With Time Incentives: Theory and Evidence

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  • Gregory Lewis
  • Patrick Bajari

Abstract

In public procurement, social welfare often depends on how quickly the good is delivered. A leading example is highway construction, where slow completion inflicts a negative externality on commuters. In response, highway departments award some contracts using scoring auctions, which give contractors explicit incentives for accelerated delivery. We characterize efficient design of these mechanisms. We then gather an extensive data set of highway projects awarded by the California Department of Transportation between 2003 and 2008. By comparing otherwise similar contracts, we show that where the scoring design was used, contracts were completed 30--40% faster and the welfare gains to commuters exceeded the increase in procurement costs. Using a structural model that endogenizes participation and bidding, we estimate that the counterfactual welfare gain from switching all contracts from the standard design to the efficient A+B design is nearly 22% of the total contract value ($1.14 billion). Copyright 2011, Oxford University Press.

Suggested Citation

  • 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.
  • Handle: RePEc:oup:qjecon:v:126:y:2011:i:3:p:1173-1211
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    File URL: http://hdl.handle.net/10.1093/qje/qjr026
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    References listed on IDEAS

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    1. 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.
    2. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Auctioning Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 921-937, October.
    3. De Silva, Dakshina G. & Dunne, Timothy & Kankanamge, Anuruddha & Kosmopoulou, Georgia, 2008. "The impact of public information on bidding in highway procurement auctions," European Economic Review, Elsevier, vol. 52(1), pages 150-181, January.
    4. Han Hong & Matthew Shum, 2002. "Increasing Competition and the Winner's Curse: Evidence from Procurement," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 871-898.
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    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • L0 - Industrial Organization - - General
    • L74 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Construction
    • L78 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Government Policy

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