Testing Low-Balling Strategy in Rural Road Procurement

Testing Low-Balling Strategy in Rural Road Procurement 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 bids. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Industrial Organization Springer Journals

Testing Low-Balling Strategy in Rural Road Procurement

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Publisher
Springer US
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Industrial Organization; Microeconomics
ISSN
0889-938X
eISSN
1573-7160
D.O.I.
10.1007/s11151-013-9388-6
Publisher site
See Article on Publisher Site

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 bids.

Journal

Review of Industrial OrganizationSpringer Journals

Published: Jun 7, 2013

References

  • An empirical analysis of entrant and incumbent bidding in road construction auctions
    Silva, D; Dunne, T; Kosmopoulou, G
  • Bidder asymmetry in infrastructure procurement: Are there any fringe bidders?
    Estache, A; Iimi, A

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