Procurement Contracting with Time Incentives: Theory and Evidence
In public sector procurement, social welfare often depends on the time taken to complete the contract. A leading example is highway construction, where slow completion times inflict a negative externality on commuters. Recently, highway departments have introduced innovative contracting methods based on scoring auctions that give contractors explicit time incentives. We characterize equilibrium bidding and efficient design of these contracts. We then gather an extensive data set of highway repair projects awarded by the California Department of Transportation between 2003 and 2008 that includes both innovative and standard contracts. Comparing similar con- tracts in which the innovative design was and was not used, we show that the welfare gains to commuters from quicker completion substantially exceeded the increase in the winning bid. Having argued that the current policy is effective, we then develop a structural econometric model that endogenizes participation and bidding to examine counterfactual policies. Our estimates suggest that while the current policy raised com- muter surplus relative to the contractor's costs by $359M (6.8% of the total contract value), the optimal policy would raise it by $1.52B (29%).
We are grateful to Saeid Asgari, Bassem Barsoum, Matthew Cugini, Perry Mayer, Mark Samuelson, Raymond Tritt and Steven Whipple of Caltrans; Rabinder Bains, Tom Ravn and Gus Wagner of Mn/DOT and David Kent of NYSDOT for their help with this paper and related projects. We would also like to thank John Asker, Susan Athey, Matt Gentzkow, Ken Hendricks, Jon Levin, Justin Marion, Ariel Pakes, Chad Syverson; seminar participants at Harvard, LSE, MIT, Toronto, UC Davis and Wisconsin; and participants at the AEA, CAPCP, IIOC, Stony Brook, UBC IO, WBEC and the NBER IO / Market Design / PE conferences for useful comments and suggestions. Lou Argentieri, Jorge Alvarez, Minjung Kim, Jason Kriss, Tom Longwell, Tina Marsh, Maryam Saeedi, Connan Snider and Hao Teng provided excellent research assistance. Finally, we gratefully acknowledge support from the NSF (grant no. SES-0924371). The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Gregory Lewis & Patrick Bajari, 2011. "Procurement Contracting With Time Incentives: Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 126(3), pages 1173-1211. citation courtesy of