Auctions vs Negotiations in Public Procurement: Which Works Better?

University of Zurich, Department of Economics, Working Paper No. 209

33 Pages Posted: 7 Nov 2015

See all articles by Rafael Lalive

Rafael Lalive

University of Lausanne - Department of Economics (DEEP); IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Armin Schmutzler

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR)

Christine Zulehner

University of Vienna - Faculty of Business, Economics, and Statistics; Télécom Paris; Austrian Institute of Economic Research (WIFO); Centre for Economic Policy Research (CEPR)

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Date Written: October 20, 2015

Abstract

Public agencies mainly rely on two modes to procure goods and services: auctions and direct negotiations. We study a 1994 policy change in Germany that introduced the possibility to procure rail services in auctions as well as in direct negotiations with the incumbent. We analyze the effect of the procurement mode on service frequency and procurement price. Our analysis relies on self-collected data on the frequency of rail service on about 500 rail lines. We first develop a theoretical framework to study an agency’s decision on the procurement mode. We then use this framework to guide our empirical analysis on rail service, procurement price, and choice of procurement mode. Results indicate that, compared with negotiations, auctions improve service levels and reduce prices. As a result, surplus on auctioned lines increased by about 30%. Interestingly, surplus would also have increased by 16% on negotiated lines had auctions been used. We argue that the predominance of non-competitive modes reflects (actual or perceived) administrative costs of carrying out auctions.

Keywords: Auctions, negotiations, liberalization, passenger railways, public procurement

JEL Classification: D43, D44, R48

Suggested Citation

Lalive, Rafael and Schmutzler, Armin and Zulehner, Christine, Auctions vs Negotiations in Public Procurement: Which Works Better? (October 20, 2015). University of Zurich, Department of Economics, Working Paper No. 209. Available at SSRN: https://ssrn.com/abstract=2687039 or http://dx.doi.org/10.2139/ssrn.2687039

Rafael Lalive (Contact Author)

University of Lausanne - Department of Economics (DEEP) ( email )

BFSH1
Lausanne, 1015
Switzerland

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Armin Schmutzler

University of Zurich - Department of Economics ( email )

Zürich, CH-8006
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Christine Zulehner

University of Vienna - Faculty of Business, Economics, and Statistics ( email )

Oskar-Morgenstern-Platz 1
Wien, 1090
Austria

HOME PAGE: http://homepage.univie.ac.at/christine.zulehner

Télécom Paris ( email )

19 Place Marguerite Perey
Palaiseau, 91120
France

Austrian Institute of Economic Research (WIFO) ( email )

P.O. Box 91
Wien, A-1103
Austria

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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