Resident Bid Preference, Affiliation, and Procurement Competition: Evidence from New Mexico

In public procurement auctions, governments typically offer preferences to qualified businesses in the form of bid discounts. Previous studies that examine how these bid preferences affect auction outcomes fail to address affiliation -- a particular type of correlation among costs that can be generated in a public procurement setting. This paper addresses that issue by studying the joint effect of bid preferences and affiliation in project-completion costs on procurement auctions using novel data from the New Mexico Department of Transportation's Resident Preference Program. Bidders, heterogeneous in residency status, compete in an auction with endogenous entry and affiliated project-completion costs for the opportunity to complete a construction project. Here affiliation is modeled using copulas, and an empirical model is developed to disentangle a bidder's participation and bidding decisions. I find that accounting for affiliation in project-completion costs considerably changes the evaluation of how offering preferences to resident bidders affects the cost of procurement and the number of resident bidders who ultimately win these preference auctions. The estimates indicate that the New Mexico Department of Transportation can increase the current level of preference to increase the number of winning resident bidders without a major change in the cost of procurement.