Enhancing Competition in Public Procurement for Sustained Growth: Applying a Double Selection Model to Road Procurement Auctions
Limited competition has been a serious concern in infrastructure procurement. Importantly, however, there are normally a number of potential bidders initially showing interest in proposed projects. This paper focuses on tackling the question why these initially interested bidders fade out. An empirical problem is that no bids of fading-out firms are observable. They could decide not to enter the process at the beginning of the tendering or may be technically disqualified at any point in the selection process. The paper applies the double selection model to procurement data from road development projects in developing countries and shows that competition ends up restricted, because bidders are self-selective and auctioneers also tend to limit participation depending on the size of contracts.Limited competition would likely lead to high infrastructure procurement costs, threatening fiscal sustainability and economic growth.
[1] V. Foster, "Ten years of water service reforms in Latin America: toward
an Anglo-French model," Water Supply and Sanitation Sector Board
Discussion Paper Series No. 3, The World Bank, 2005.
[2] NOA. Improving the PFI Tendering Process. The National Audit Office,
2007
[3] A. Estache and A. Iimi. "Procurement efficiency for infrastructure
development and financial needs reassessed," Policy Research Working
Paper No. 4662, the World Bank, 2008.
[4] E. Brannman, D. Klein, and L. Weiss. "The price effect of increased
competition in auction markets," The Review of Economics and Statistics,
Vol. 69, pp. 24-32, 1987.
[5] H. Paarsch. "Deciding between the common and private value paradigms
in empirical models of auctions," Journal of Econometrics, Vol. 51, pp.
191-215, 1992.
[6] S. Gupta. "Competition and collusion in a government procurement
auction market," Atlantic Economic Journal, Vol. 30, pp. 13-25, 2002.
[7] P. Bajari and A. Hortaçsu. "Winner-s curse, reserve prices and
endogenous entry: empirical insights from eBay auctions," The RAND
Journal of Economics, Vol. 34(2), pp. 329-355, 2003.
[8] P. Bajari and S. Tadelis. "Incentives versus transaction costs: a theory of
procurement contracts," The RAND Journal of Economics, Vol. 32, pp.
387-407, 2001.
[9] J. Bulow and P. Klemperer. "Auctions versus negotiations," The
American Economic Review, Vol. 86(1), pp. 180-194, 1996.
[10] P. McAfee and J. McMillan. "Auctions with entry," Economics Letters,
Vol. 23, pp. 343-347, 1987.
[11] D. Levin and J. Smith. "Equilibrium in auctions with entry," The
American Economic Review, Vol. 84, pp. 585-599, 1994.
[12] F. Menezes and P. Monteiro. "Auction with endogenous participation,"
Review of Economic Design, Vol. 5, pp. 71-89, 2000.
[13] T. Li and I. Perrigne. "Timber sale auctions with random reserve
prices," The Review of Economics and Statistics, Vol. 85, pp. 189-200,
2003.
[14] T. Li and X. Zheng. "Entry and competition effects in first-price auctions:
theory and evidence from procurement auctions," Cemmap working paper
CWP13/06, University College London, 2006.
[15] H. Ohashi. "Effects of transparency in procurement practices on
government expenditure: a case study municipal public works," CIRJE
Discussion Paper No. 548, University of Tokyo, 2008.
[16] A. Estache and A. Iimi. "Auctions with endogenous participation and
quality thresholds: evidence from ODA infrastructure procurement,"
Policy Research Working Paper No. 4853, the World Bank, 2009.
[17] T. Amemiya. "Qualitative models," Annals of Economic and Social
Measurement, Vol. 4, pp. 363-372, 1975.
[18] G.S. Maddala. Limited-Dependent and Qualitative Variables in
Econometrics. Cambridge University Press, 1983.
[19] J. Heckman. "Sample selection bias as a specification error,"
Econometrica, Vol. 47, pp. 153-161, 1979.
[20] L-F. Lee. "Unionism and wage rates: a simultaneous equation model with
qualitative and limited dependent variables," International Economics
Review, Vol. 19, pp. 415-433, 1978.
[21] Y-K. Che. "Design competition through multidimensional auctions,"
Rand Journal of Economics, Vol. 24, pp. 668-680, 1993.
[22] M. Cripps and N. Ireland. "The design of auctions and tenders with
quality thresholds: the symmetric case," The Economic Journal, Vol. 104,
pp. 316-326, 1994.
[23] M. Klein. "Bidding for concessions," Policy Research Working Paper
Series No. 1957, The World Bank, 1998.
[24] G. Ware, S. Moss, E. Campos, and G. Noone. "Corruption in public
procurement: a perennial challenge," in The Many Faces of Corruption:
Tracking Vulnerabilities at the Sector Level, eds. by Edgardo Campos and
Sanjay Pradhan, pp. 295-334. The World Bank, 2007.
[25] A. Estache, J-L. Guasch, A. Iimi, and L. Trujillo. "Multidimensionality
and renegotiation: evidence from transport-sector
public-private-partnership transactions in Latin America," Policy
Research Working Paper No. 4665, the World Bank, 2008.
[26] C.E. Moody and W.J. Kruvant. "Joint bidding, entry and the price of OCS
leases," Rand Journal of Economics, Vol. 19, pp. 276-284, 1988.
[27] K. Hendricks and R. Porter. "Joint bidding in federal OCS auctions," The
American Economic Review, Vol. 82, pp. 506-511, 1992.
[28] A. Iimi. "(Anti-)Competitive effect of joint bidding: evidence from ODA
procurement auctions," Journal of The Japanese and International
Economies, Vol. 18, pp. 416-439, 2004.
[29] E. Maskin and J. Riley. "Asymmetric auctions," The Review of Economic
Studies, Vol. 67, pp. 413-438, 2000.
[30] D. De Silva, T. Dunne, and G. Kosmopoulou. "Sequential bidding in
auctions of construction contracts," Economics Letters, Vol. 76, pp.
239-244, 2002.
[31] D. De Silva, T. Dunne, and G. Kosmopoulou. "An empirical analysis of
entrant and incumbent bidding in road construction auctions," The
Journal of Industrial Economics, Vol. 51, pp. 295-316, 2003.
[32] A. Estache and A. Iimi. "Bidder asymmetry in infrastructure procurement:
are there any fringe bidders?" Policy Research Working Paper No. 4660,
the World Bank, 2008.
[33] P. Milgrom and R. Weber. "A theory of auctions and competitive
bidding," Econometrica, Vol. 50, pp. 1089-1122, 1982.
[34] P. Klemperer. "How (not) to run auctions: the European 3G telecom
auctions," European Economic Review, Vol. 46, pp. 829-845, 2002.
[35] R. Porter, Robert and D. Zona. "Detection of bid rigging in procurement
auctions," Journal of Political Economy, Vol. 101, pp. 518-538, 1993.
[36] S. Gupta. "The effect of bid rigging on prices: a study of the highway
construction industry," Review of Industrial Organization, Vol. 19, pp.
453-467, 2001.
[37] A. Iimi. "Auction reforms for effective official development assistance,"
Review of Industrial Organization, Vol. 28, pp. 109-128, 2006.
[38] D. Poirier. "Partial observability in bivariate probit models," Journal of
Econometrics, Vol. 12, pp. 209-217, 1980.
[39] L-F. Lee. "Generalized econometric models with selectivity,"
Econometrica, Vol. 51, pp. 507-512, 1983.
[40] I. Tunali. "A general structure for models of double selection and an
application to a joint migration/earning process with remigration,"
Research in Labor Economics, Vol. 8, Part B, pp. 235-282, 1983.
[41] M. Mohanty. "Testing for the specification of the wage equation: double
selection approach or single selection approach," Applied Economics
Letter, Vol. 8, pp. 525-529, 2001.
[42] L. Rezende. "Auction econometrics with least squares. Ph.D. dissertation,
University of Illinois, Urbana-Champlain, IL, 2005.
[43] P. Bajari, R. McMillan, and S. Tadelis. "Auctions versus negotiations in
procurement: an empirical analysis," Journal of Law, Economics and
Organization, to be published.
[44] M. Price. "Using the spatial distribution of bidders to detect collusion in
the marketplace: evidence from timber auctions," Journal of Regional
Science, Vol. 48, pp. 399-417, 2008.
[1] V. Foster, "Ten years of water service reforms in Latin America: toward
an Anglo-French model," Water Supply and Sanitation Sector Board
Discussion Paper Series No. 3, The World Bank, 2005.
[2] NOA. Improving the PFI Tendering Process. The National Audit Office,
2007
[3] A. Estache and A. Iimi. "Procurement efficiency for infrastructure
development and financial needs reassessed," Policy Research Working
Paper No. 4662, the World Bank, 2008.
[4] E. Brannman, D. Klein, and L. Weiss. "The price effect of increased
competition in auction markets," The Review of Economics and Statistics,
Vol. 69, pp. 24-32, 1987.
[5] H. Paarsch. "Deciding between the common and private value paradigms
in empirical models of auctions," Journal of Econometrics, Vol. 51, pp.
191-215, 1992.
[6] S. Gupta. "Competition and collusion in a government procurement
auction market," Atlantic Economic Journal, Vol. 30, pp. 13-25, 2002.
[7] P. Bajari and A. Hortaçsu. "Winner-s curse, reserve prices and
endogenous entry: empirical insights from eBay auctions," The RAND
Journal of Economics, Vol. 34(2), pp. 329-355, 2003.
[8] P. Bajari and S. Tadelis. "Incentives versus transaction costs: a theory of
procurement contracts," The RAND Journal of Economics, Vol. 32, pp.
387-407, 2001.
[9] J. Bulow and P. Klemperer. "Auctions versus negotiations," The
American Economic Review, Vol. 86(1), pp. 180-194, 1996.
[10] P. McAfee and J. McMillan. "Auctions with entry," Economics Letters,
Vol. 23, pp. 343-347, 1987.
[11] D. Levin and J. Smith. "Equilibrium in auctions with entry," The
American Economic Review, Vol. 84, pp. 585-599, 1994.
[12] F. Menezes and P. Monteiro. "Auction with endogenous participation,"
Review of Economic Design, Vol. 5, pp. 71-89, 2000.
[13] T. Li and I. Perrigne. "Timber sale auctions with random reserve
prices," The Review of Economics and Statistics, Vol. 85, pp. 189-200,
2003.
[14] T. Li and X. Zheng. "Entry and competition effects in first-price auctions:
theory and evidence from procurement auctions," Cemmap working paper
CWP13/06, University College London, 2006.
[15] H. Ohashi. "Effects of transparency in procurement practices on
government expenditure: a case study municipal public works," CIRJE
Discussion Paper No. 548, University of Tokyo, 2008.
[16] A. Estache and A. Iimi. "Auctions with endogenous participation and
quality thresholds: evidence from ODA infrastructure procurement,"
Policy Research Working Paper No. 4853, the World Bank, 2009.
[17] T. Amemiya. "Qualitative models," Annals of Economic and Social
Measurement, Vol. 4, pp. 363-372, 1975.
[18] G.S. Maddala. Limited-Dependent and Qualitative Variables in
Econometrics. Cambridge University Press, 1983.
[19] J. Heckman. "Sample selection bias as a specification error,"
Econometrica, Vol. 47, pp. 153-161, 1979.
[20] L-F. Lee. "Unionism and wage rates: a simultaneous equation model with
qualitative and limited dependent variables," International Economics
Review, Vol. 19, pp. 415-433, 1978.
[21] Y-K. Che. "Design competition through multidimensional auctions,"
Rand Journal of Economics, Vol. 24, pp. 668-680, 1993.
[22] M. Cripps and N. Ireland. "The design of auctions and tenders with
quality thresholds: the symmetric case," The Economic Journal, Vol. 104,
pp. 316-326, 1994.
[23] M. Klein. "Bidding for concessions," Policy Research Working Paper
Series No. 1957, The World Bank, 1998.
[24] G. Ware, S. Moss, E. Campos, and G. Noone. "Corruption in public
procurement: a perennial challenge," in The Many Faces of Corruption:
Tracking Vulnerabilities at the Sector Level, eds. by Edgardo Campos and
Sanjay Pradhan, pp. 295-334. The World Bank, 2007.
[25] A. Estache, J-L. Guasch, A. Iimi, and L. Trujillo. "Multidimensionality
and renegotiation: evidence from transport-sector
public-private-partnership transactions in Latin America," Policy
Research Working Paper No. 4665, the World Bank, 2008.
[26] C.E. Moody and W.J. Kruvant. "Joint bidding, entry and the price of OCS
leases," Rand Journal of Economics, Vol. 19, pp. 276-284, 1988.
[27] K. Hendricks and R. Porter. "Joint bidding in federal OCS auctions," The
American Economic Review, Vol. 82, pp. 506-511, 1992.
[28] A. Iimi. "(Anti-)Competitive effect of joint bidding: evidence from ODA
procurement auctions," Journal of The Japanese and International
Economies, Vol. 18, pp. 416-439, 2004.
[29] E. Maskin and J. Riley. "Asymmetric auctions," The Review of Economic
Studies, Vol. 67, pp. 413-438, 2000.
[30] D. De Silva, T. Dunne, and G. Kosmopoulou. "Sequential bidding in
auctions of construction contracts," Economics Letters, Vol. 76, pp.
239-244, 2002.
[31] D. De Silva, T. Dunne, and G. Kosmopoulou. "An empirical analysis of
entrant and incumbent bidding in road construction auctions," The
Journal of Industrial Economics, Vol. 51, pp. 295-316, 2003.
[32] A. Estache and A. Iimi. "Bidder asymmetry in infrastructure procurement:
are there any fringe bidders?" Policy Research Working Paper No. 4660,
the World Bank, 2008.
[33] P. Milgrom and R. Weber. "A theory of auctions and competitive
bidding," Econometrica, Vol. 50, pp. 1089-1122, 1982.
[34] P. Klemperer. "How (not) to run auctions: the European 3G telecom
auctions," European Economic Review, Vol. 46, pp. 829-845, 2002.
[35] R. Porter, Robert and D. Zona. "Detection of bid rigging in procurement
auctions," Journal of Political Economy, Vol. 101, pp. 518-538, 1993.
[36] S. Gupta. "The effect of bid rigging on prices: a study of the highway
construction industry," Review of Industrial Organization, Vol. 19, pp.
453-467, 2001.
[37] A. Iimi. "Auction reforms for effective official development assistance,"
Review of Industrial Organization, Vol. 28, pp. 109-128, 2006.
[38] D. Poirier. "Partial observability in bivariate probit models," Journal of
Econometrics, Vol. 12, pp. 209-217, 1980.
[39] L-F. Lee. "Generalized econometric models with selectivity,"
Econometrica, Vol. 51, pp. 507-512, 1983.
[40] I. Tunali. "A general structure for models of double selection and an
application to a joint migration/earning process with remigration,"
Research in Labor Economics, Vol. 8, Part B, pp. 235-282, 1983.
[41] M. Mohanty. "Testing for the specification of the wage equation: double
selection approach or single selection approach," Applied Economics
Letter, Vol. 8, pp. 525-529, 2001.
[42] L. Rezende. "Auction econometrics with least squares. Ph.D. dissertation,
University of Illinois, Urbana-Champlain, IL, 2005.
[43] P. Bajari, R. McMillan, and S. Tadelis. "Auctions versus negotiations in
procurement: an empirical analysis," Journal of Law, Economics and
Organization, to be published.
[44] M. Price. "Using the spatial distribution of bidders to detect collusion in
the marketplace: evidence from timber auctions," Journal of Regional
Science, Vol. 48, pp. 399-417, 2008.
@article{"International Journal of Business, Human and Social Sciences:54787", author = "Antonio Estache and Atsushi Iimi", title = "Enhancing Competition in Public Procurement for Sustained Growth: Applying a Double Selection Model to Road Procurement Auctions", abstract = "Limited competition has been a serious concern in infrastructure procurement. Importantly, however, there are normally a number of potential bidders initially showing interest in proposed projects. This paper focuses on tackling the question why these initially interested bidders fade out. An empirical problem is that no bids of fading-out firms are observable. They could decide not to enter the process at the beginning of the tendering or may be technically disqualified at any point in the selection process. The paper applies the double selection model to procurement data from road development projects in developing countries and shows that competition ends up restricted, because bidders are self-selective and auctioneers also tend to limit participation depending on the size of contracts.Limited competition would likely lead to high infrastructure procurement costs, threatening fiscal sustainability and economic growth.
", keywords = "Auction theory, endogenous bidder entry,infrastructure development, public procurement.", volume = "3", number = "6", pages = "850-9", }
