Rev Ind Organ (2013) 43:243–261
Testing Low-Balling Strategy in Rural Road
Published online: 7 June 2013
© Springer Science+Business Media New York 2013
Abstract A “low-balling strategy” by bidding contractors has increasingly been
recognized as an important issue in public infrastructure procurement. Public works
contracts are often imperfect and renegotiated after the contract award. Given the
expectation for ex post adjustments, bidders seem motivated to take advantage of the
low-balling strategy. This paper analyzes the endogeneity between the bid strategy and
ex post adjustments. Using procurement data on rural road projects in Nepal, it shows
that the bid strategy and adjustments are determined endogenously in the system.
Anticipating cost and time overruns, ﬁrms would likely undercut normal bid prices.
Then, ex post contract adjustments actually happen, because of their too aggressive
Keywords Auction theory · Competition · Ethnicity · Governance · Market entry ·
Public procurement · Rural roads
JEL Classiﬁcation D44 · H54 · H57 · D82
Public procurement is an important policy instrument for using resources efﬁciently.
It is particularly vital for developing countries where resources are limited. In theory,
This paper is partially based on our early working paper “Efﬁciency in Public Procurement
in Rural Road Projects of Nepal,” World Bank Policy Research Working Paper 5736.
A. Iimi (
Sustainable Development Department, Africa Region,
The World Bank, 1818 H Street, NW, Washington, DC 20433, USA