Essays On Preference Programs In Government Procurement

In public-sector procurement, governments frequently offer programs that give preferential treatment to certain groups of firms. My dissertation examines how these programs affect procurement outcomes. I study two types of preference programs: subcontracting requirements, where the government requires that a particular percentage share of a contract be completed by preferred subcontractors, and bid discounts, where the government lowers the bids of preferred firms for comparison purposes and pays the full price to the firm with the lowest bid. My dissertation has two chapters. My first chapter addresses subcontracting requirements applied under New Mexico\u27s Disadvantaged Business Enterprise Program. This program uses subcontracting requirements to support firms considered disadvantaged in federal procurement, which are small firms owned and controlled by minorities or women. Theoretically, I find that subcontracting requirements need not substantially increase the final cost of procurement, even when preferred firms are relatively more costly. The intuition behind this result is that, by restricting the pool of subcontractors, firms know more about their competitors\u27 costs, which causes firms to reduce their markups. Using an empirical version of the theoretical model estimated on New Mexico\u27s federal procurement data, I find that subcontracting requirements only increased procurement costs by 0.3 percent yet led to a 12.7 percent increase in the amount of money awarded to preferred subcontractors. My second chapter investigates bid discounts awarded to resident firms under New Mexico\u27s Resident Preference Program. Unlike other papers in the bid discounting literature, my methodology accounts for potentially affiliated project costs -- which is likely to arise in these procurement settings since firms typically share subcontractors and suppliers. Using an empirical auction model estimated on data from New Mexico\u27s Resident Preference Program, I find that offering preference to resident bidders led to a 1.2 percent increase in procurement costs; however, procurement costs are 2.9 percent higher than would be predicted if the model did not account for project-cost affiliation. This chapter highlights the importance of accounting for affiliation in the evaluation of bid preference programs

Affirmative Action Subcontracting Regulations in Dynamic Procurement Auctions

I study affirmative action subcontracting regulations in a model where governments use auctions to repeatedly procure goods and services at the lowest possible price. Through using disadvantaged subcontractors, prime contractors build relationships over time, resulting in lower subcontracting costs in future periods. I find that regulation in the form of a minimum subcontracting requirement expands bidder asymmetries, favoring prime contractors with stronger relationships over those with weaker ones. Simulations show that the manner in which relationships evolve determines not only the utilization of disadvantaged subcontractors but also the procurement costs attained under affirmative action

Affirmative Action Subcontracting Regulations in Dynamic Procurement Auctions

I study affirmative action subcontracting regulations in a model where governments use auctions to repeatedly procure goods and services at the lowest possible price. Through using disadvantaged subcontractors, prime contractors build relationships over time, resulting in lower subcontracting costs in future periods. I find that regulation in the form of a minimum subcontracting requirement expands bidder asymmetries, favoring prime contractors with stronger relationships over those with weaker ones. Simulations show that the manner in which relationships evolve determines not only the utilization of disadvantaged subcontractors but also the procurement costs attained under affirmative action

Horizontal Subcontracting in Procurement Auctions

A firm submitting a bid in a procurement auction is sometimes also listed as a subcontractor in one or more competing bids. This paper theoretically and empirically examines how such horizontal subcontracting affects welfare and price competition. I first specify a model of horizontal subcontracting which endogenizes the roles of the subcontracting firms as well as a negotiated payment for subcontracted work. The model shows that horizontal subcontracting always weakly increases welfare by enabling more efficient allocation of production but has two opposite effects on price competition: an efficiency effect and a strategic effect. The efficiency effect arises when firms use the subcontract to lower production costs and submit lower bids. However, horizontal subcontracting can soften competition by allowing strategic firms to raise each other\u27s opportunity costs of winning the auction, producing higher bids. I find empirical support for the model\u27s implications using detailed data collected from highway procurement auctions in California. I find that strategy-driven horizontal subcontracts yield 6% higher prices relative to efficiency-driven horizontal subcontracts

Auctions for Split-Award Contracts

The buyer of a homogeneous input employs split-award contracting to divide his input requirements into two contracts that are awarded to different suppliers. The buyer uses a sequential second-price auction to award a larger primary contract and a smaller secondary contract. With a fixed number of suppliers participating in the auctions, we find that the buyer pays a higher expected price than with a sole-source auction. The premium paid to the winner of the secondary contract must also be paid to the winner of the primary contract as an opportunity cost of not winning the secondary contract. With fixed costs of participating in the auction, we identify the conditions under which a secondary contract can increase the number of suppliers and lower the expected price paid by the buyer. An optimal secondary contract can internalize the cost reductions from the new industry capacity and extract the rents of the suppliers. An optimal secondary contract can be particularly beneficial when the number of suppliers is limited by high fixed costs.

Tendering Universal Service Obligations in Liberalized Network Industries

In the past decades, several countries have introduced reverse auctions for allocating universal service or public mission subsidies in various industries. Examples include urban transport, air transport and telecommunications. Recently, such mechanisms have also been envisioned in liberalized postal markets. Issuing an invitation to tender for obligations in otherwise liberalized markets significantly differs from auctioning off a monopolistic provision of services or goods (competition for the market), as is e.g. the case with spectrum auctions in the telecommunications sector. We discuss the rationale for introducing such a regulatory regime as well as conceptual and practical issues concerning its implementation. It turns out that designing an efficient tender for universal service subsidies in liberalized markets is considerably more difficult than tendering e.g. a monopoly franchise. A first reason is that the cost assessment is more complex in the former case as future competitive market outcomes have to be anticipated; in the case with franchise bidding, at least the number of competitors is given by the tender itself. Hence, revenue effects caused by competitors are easier to calculate. Second, the threat of a winner’s moral hazard requires more detailed ex ante regulations. These raise the social cost of universal service provision. Compared to direct designation of universal services with ex post compensation, tendering causes a series of fundamental concerns and trade-offs that make the application of auctions less attractive than in other sectors.Procurement, Tendering, Reverse Auctions, Universal Service Obligation, Liberalization, Network Industries

The shadow cost of disadvantaged business enterprise (DBE) project participation goals in Tennessee highway construction

Highway and bridge construction on interstate highways, U.S. highway routes, and state highways is partially funded by federal gasoline taxes and administered by the individual state departments of transportation. In 1983 the U.S. government instituted legislation that increased the opportunity for disadvantaged business enterprise (DBE) firms to participate in federally-funded highway construction. After subsequent evolution, this legislation remains the subject of debate due to its economic impact and social implications. Some industry participants characterize the DBE program as inefficient because of the perception that DBE project participation goals create higher project costs and administrative burden. The price paid to achieve an equity objective is known as a shadow cost. This paper examines whether DBE participation goals imposed shadow costs to Tennessee highway projects during the years 2005 - 2008. This question is considered against a backdrop of the political economics of the policies behind the goals. Measuring a shadow cost is relevant to efficiency and public policy. Since highway construction funding comes from federal and state gasoline tax revenue, nearly all Tennessee and U.S. motorists are affected