Procurement Contracting with Time Incentives: Theory and Evidence

46 Pages Posted: 13 Apr 2009 Last revised: 5 Aug 2022

See all articles by Patrick Bajari

Patrick Bajari

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Gregory Lewis

Harvard University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2009

Abstract

In public sector procurement, social welfare often depends on the time taken to complete the contract. A leading example is highway construction, where slow completion times inflict a negative externality on commuters. Recently, highway departments have introduced innovative contracting methods based on scoring auctions that give contractors explicit time incentives. We characterize equilibrium bidding and efficient design of these contracts. We then gather an extensive data set of highway repair projects awarded by the California Department of Transportation between 2003 and 2008 that includes both innovative and standard contracts. Comparing similar con- tracts in which the innovative design was and was not used, we show that the welfare gains to commuters from quicker completion substantially exceeded the increase in the winning bid. Having argued that the current policy is effective, we then develop a structural econometric model that endogenizes participation and bidding to examine counterfactual policies. Our estimates suggest that while the current policy raised com- muter surplus relative to the contractor's costs by $359M (6.8% of the total contract value), the optimal policy would raise it by $1.52B (29%).

Suggested Citation

Bajari, Patrick and Lewis, Gregory, Procurement Contracting with Time Incentives: Theory and Evidence (April 2009). NBER Working Paper No. w14855, Available at SSRN: https://ssrn.com/abstract=1376158

Patrick Bajari (Contact Author)

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Gregory Lewis

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