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  5. Competition under Incomplete Contracts and the Design of Procurement Policies

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Competition under Incomplete Contracts and the Design of Procurement Policies

  • Rodrigo Carril
  • Andres Gonzalez-Lira
  • Michael S. Walker
American Economic Review (Forthcoming)

Abstract

We study the effects of intensifying competition for contracts in the context of U.S. Defense procurement. Leveraging a discontinuous regulation that mandates agencies to publicize certain contract opportunities, we document that expanding the set of bidders reduces award prices but deteriorates post-award performance in terms of cost overruns and delays. We develop and estimate an auction model with endogenous entry and stochastic execution performance, in which the buyer endogenously chooses the intensity of competition. Model estimates indicate substantial heterogeneity in performance across contractors and show that simple adjustments to the current regulation could provide significant savings in procurement spending.

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