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Project modifications and bidding in highway procurement auctions

Author

Listed:
  • Dakshina G. De Silva
  • Timothy Dunne
  • Georgia Kosmopoulou
  • Carlos Lamarche

Abstract

This paper examines bidding behavior in a setting where post-bid-letting project modifications occur. These modifications change both the costs and payouts to the winning contractor, making the contract incomplete. Recent empirical research shows that bidders incorporate the likelihood of such changes in contracts into their bidding strategies. In particular, contractors may adjust bids to compensate for renegotiation, resequencing of tasks, and other costs associated with project modifications. This paper extends this literature by examining bidding behavior and project modifications in Texas, where there has been a significant shift in change order policy. Specifically, Texas sharply reduced its spending on change orders starting in the mid-2000s. In the period before the change in policy, we estimate that project modifications raised bidder costs by 4 percent to 6 percent. In the period after the change in policy, the impact of project modifications on bidder costs is estimated to be closer to 1 percent.

Suggested Citation

  • Dakshina G. De Silva & Timothy Dunne & Georgia Kosmopoulou & Carlos Lamarche, 2015. "Project modifications and bidding in highway procurement auctions," FRB Atlanta Working Paper 2015-14, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:2015-14
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    References listed on IDEAS

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    Cited by:

    1. Nyström, Johan & Wikström, Daniel, 2019. "Empirical analysis of unbalanced bidding on Swedish roads," Working Papers 2019:4, Swedish National Road & Transport Research Institute (VTI).
    2. Francesco Decarolis & Leonardo M Giuffrida & Elisabetta Iossa & Vincenzo Mollisi & Giancarlo Spagnolo, 2020. "Bureaucratic Competence and Procurement Outcomes [“Politics and Economics in Weak and Strong States]," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 36(3), pages 537-597.

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    More about this item

    Keywords

    procurement auctions; incomplete contracts;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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