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An Econometric Identification of Abnormally Low Bids in Procurement Market: Discriminant Analysis

Author

Listed:
  • Jinook Jeong

    (Yonsei University)

  • Hyunwoo Lee

    (Yonsei University)

Abstract

In the public construction procurement market, 'abnormally low bids (ALB)' are prevalent and they cause many social and economic problems. Also, when the procurement bids are colluded, ALB make the competitive price systematically underestimated. As many countries regulate ALB, their criteria to identify ALB are not homogenous. Most of the criteria are based on construction cost, which is usually inaccurate, vulnerable to accounting manipulation, and limited to the supply side information of the market. We propose an econometric identification process of ALB using a discriminant analysis. It is based on a switching regression with incomplete separation information and easily estimable by MLE. Through a Monte Carlo simulation, we show that our new method works well. We apply our method to Korean public construction bidding data from 2007 to 2016. The estimation results identify the determinants of the bid prices, along with the determinants of ALB, and presents a more accurate assessment of the collusion damage.

Suggested Citation

  • Jinook Jeong & Hyunwoo Lee, 2018. "An Econometric Identification of Abnormally Low Bids in Procurement Market: Discriminant Analysis," Working papers 2018rwp-129, Yonsei University, Yonsei Economics Research Institute.
    • Handle: RePEc:yon:wpaper:2018rwp-129
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    Keywords

    abnormally low bids; discriminant analysis; public procurement market;
    All these keywords.

    JEL classification:

    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L70 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - General

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