Sourcing from the Enemy: Horizontal Subcontracting in Highway Procurement

29 Pages Posted: 31 Mar 2015

See all articles by Justin G. Marion

Justin G. Marion

University of California, Santa Cruz - Division of Social Sciences

Date Written: March 2015

Abstract

I empirically consider the effect of horizontal subcontracting on firm bidding strategies in California highway construction auctions. Subcontractors are hired by prime contractors prior to the auction, and the subcontractor may also be a competitor in the primary auction. While horizontal subcontracting may improve productive efficiency, it softens the horizontal subcontractor's bid strategy, since winning the auction may entail losing subcontracting business. I find that while each additional competitor supplied by the firm is estimated to increase its bid by 1.4 per cent, the winning bid is uncorrelated with horizontal subcontracting. This points toward an efficiency motive for cross‐supply.

Suggested Citation

Marion, Justin G., Sourcing from the Enemy: Horizontal Subcontracting in Highway Procurement (March 2015). The Journal of Industrial Economics, Vol. 63, Issue 1, pp. 100-128, 2015. Available at SSRN: https://ssrn.com/abstract=2587468 or http://dx.doi.org/10.1111/joie.12065

Justin G. Marion (Contact Author)

University of California, Santa Cruz - Division of Social Sciences ( email )

401 Engineering 2
1156 High Street
Santa Cruz, CA 95064
United States
831-459-2848 (Phone)
831-459-5077 (Fax)

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