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.
Digital Object Identifier (DOI): doi.org/10.5281/zenodo.1061527Procedia APA BibTeX Chicago EndNote Harvard JSON MLA RIS XML ISO 690 PDF Downloads 1014
 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.
 NOA. Improving the PFI Tendering Process. The National Audit Office, 2007
 A. Estache and A. Iimi. "Procurement efficiency for infrastructure development and financial needs reassessed," Policy Research Working Paper No. 4662, the World Bank, 2008.
 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.
 H. Paarsch. "Deciding between the common and private value paradigms in empirical models of auctions," Journal of Econometrics, Vol. 51, pp. 191-215, 1992.
 S. Gupta. "Competition and collusion in a government procurement auction market," Atlantic Economic Journal, Vol. 30, pp. 13-25, 2002.
 P. Bajari and A. Horta├ºsu. "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.
 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.
 J. Bulow and P. Klemperer. "Auctions versus negotiations," The American Economic Review, Vol. 86(1), pp. 180-194, 1996.
 P. McAfee and J. McMillan. "Auctions with entry," Economics Letters, Vol. 23, pp. 343-347, 1987.
 D. Levin and J. Smith. "Equilibrium in auctions with entry," The American Economic Review, Vol. 84, pp. 585-599, 1994.
 F. Menezes and P. Monteiro. "Auction with endogenous participation," Review of Economic Design, Vol. 5, pp. 71-89, 2000.
 T. Li and I. Perrigne. "Timber sale auctions with random reserve prices," The Review of Economics and Statistics, Vol. 85, pp. 189-200, 2003.
 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.
 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.
 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.
 T. Amemiya. "Qualitative models," Annals of Economic and Social Measurement, Vol. 4, pp. 363-372, 1975.
 G.S. Maddala. Limited-Dependent and Qualitative Variables in Econometrics. Cambridge University Press, 1983.
 J. Heckman. "Sample selection bias as a specification error," Econometrica, Vol. 47, pp. 153-161, 1979.
 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.
 Y-K. Che. "Design competition through multidimensional auctions," Rand Journal of Economics, Vol. 24, pp. 668-680, 1993.
 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.
 M. Klein. "Bidding for concessions," Policy Research Working Paper Series No. 1957, The World Bank, 1998.
 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.
 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.
 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.
 K. Hendricks and R. Porter. "Joint bidding in federal OCS auctions," The American Economic Review, Vol. 82, pp. 506-511, 1992.
 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.
 E. Maskin and J. Riley. "Asymmetric auctions," The Review of Economic Studies, Vol. 67, pp. 413-438, 2000.
 D. De Silva, T. Dunne, and G. Kosmopoulou. "Sequential bidding in auctions of construction contracts," Economics Letters, Vol. 76, pp. 239-244, 2002.
 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.
 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.
 P. Milgrom and R. Weber. "A theory of auctions and competitive bidding," Econometrica, Vol. 50, pp. 1089-1122, 1982.
 P. Klemperer. "How (not) to run auctions: the European 3G telecom auctions," European Economic Review, Vol. 46, pp. 829-845, 2002.
 R. Porter, Robert and D. Zona. "Detection of bid rigging in procurement auctions," Journal of Political Economy, Vol. 101, pp. 518-538, 1993.
 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.
 A. Iimi. "Auction reforms for effective official development assistance," Review of Industrial Organization, Vol. 28, pp. 109-128, 2006.
 D. Poirier. "Partial observability in bivariate probit models," Journal of Econometrics, Vol. 12, pp. 209-217, 1980.
 L-F. Lee. "Generalized econometric models with selectivity," Econometrica, Vol. 51, pp. 507-512, 1983.
 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.
 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.
 L. Rezende. "Auction econometrics with least squares. Ph.D. dissertation, University of Illinois, Urbana-Champlain, IL, 2005.
 P. Bajari, R. McMillan, and S. Tadelis. "Auctions versus negotiations in procurement: an empirical analysis," Journal of Law, Economics and Organization, to be published.
 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.