Optimal Cost Overruns: Procurement Auctions With Renegotiation

Herweg, Fabian; Schwarz, Marco A.

doi:10.1111/iere.12327

“…As Bandiera, Prat and Valletti (2009), clearly showed for the procurement of standardised goods, the presence of bureaucratic inefficiency might lead to overestimate corruption. Furthermore, for the procurement of public work, as renegotiation might be an optimal strategy for complex contracts Herweg and Schwarz (2018). Table 4 offers clear evidence on the limits of using extra cost and extra time as indirect corruption outcomes.…”

Section: Indicators' Validationmentioning

confidence: 99%

Corruption Red Flags in Public Procurement: New Evidence from Italian Calls for Tenders

Decarolis

¹

,

Giorgiantonio

²

2020

View full text Add to dashboard Cite

This paper contributes to the analysis of quantitative indicators (i.e., red flags or screens) to detect corruption in public procurement. Expanding the set of commonly discussed indicators in the literature to new ones derived from the operating practices of police forces and the judiciary, this paper verifies the presence of these red flags in a sample of Italian awarding procedures for roadwork contracts in the period 2009-2015. Then, it validates the efficacy of the indicators through measures of direct corruption risks (judiciary cases and police investigations for corruption-related crimes) and indirect corruption risks (delays and cost overruns). From a policy perspective, our analysis shows that the most effective red flags in detecting corruption risks are those related to discretionary mechanisms for selecting private contractors (such as the most economically advantageous offer or negotiated procedures), compliance with the minimum time limit for the submission of tenders and subcontracting. Moreover, our analysis suggests that greater standardization in the call for tender documents can contribute to reducing corruption risks. From a methodological point of view, the paper highlights the relevance of prediction approaches based on machine learning methods (especially the random forests algorithm) for validating a large set of indicators.

show abstract

“…As Bandiera, Prat and Valletti (2009), clearly showed for the procurement of standardised goods, the presence of bureaucratic inefficiency might lead to overestimate corruption. Furthermore, for the procurement of public work, as renegotiation might be an optimal strategy for complex contracts Herweg and Schwarz (2018).…”

Section: Indicators' Validationmentioning

confidence: 99%

Corruption Red Flags in Public Procurement: New Evidence from Italian Calls for Tenders

Decarolis

¹

,

Giorgiantonio

²

2020

SSRN Journal

8

0

View full text Add to dashboard Cite

This paper contributes to the analysis of quantitative indicators (i.e., red flags or screens) to detect corruption in public procurement. Expanding the set of commonly discussed indicators in the literature to new ones derived from the operating practices of police forces and the judiciary, this paper verifies the presence of these red flags in a sample of Italian awarding procedures for roadwork contracts in the period 2009-2015. Then, it validates the efficacy of the indicators through measures of direct corruption risks (judiciary cases and police investigations for corruption-related crimes) and indirect corruption risks (delays and cost overruns). From a policy perspective, our analysis shows that the most effective red flags in detecting corruption risks are those related to discretionary mechanisms for selecting private contractors (such as the most economically advantageous offer or negotiated procedures), compliance with the minimum time limit for the submission of tenders and subcontracting. Moreover, our analysis suggests that greater standardization in the call for tender documents can contribute to reducing corruption risks. From a methodological point of view, the paper highlights the relevance of prediction approaches based on machine learning methods (especially the random forests algorithm) for validating a large set of indicators.

show abstract

“…A classic strand of the literature investigates moral hazard as the main source of renegotiation (Fudenberg and Tirole, 1990 or Herweg and Schmidt, 2015 for a more recent contribution). Another line of reasoning identifies design flaws as a source of renegotiation (Herweg and Schmidt, 2017;Herweg and Schwarz, 2018). Suppliers have private information about potential design flaws of the procurement project and leverage this information to capture additional rents during the project.…”

Section: Literature Reviewmentioning

confidence: 99%

Sequential Procurement with Limited Commitment

Fugger

¹

,

Gretschko

²

,

Pollrich

³

2019

View full text Add to dashboard Cite

We analyze the problem of a buyer who chooses a supplier for a long-term relationship via an auction. The buyer lacks commitment to not renegotiate the terms of the contract in the long run. Thus, suppliers are cautious about the information revealed during the auction. We show theoretically and experimentally that first-price auctions perform poorly in terms of efficiency and buyer surplus. Suppliers may pool on a high bid to conceal information. Second-price auctions retain their efficient equilibrium and generate substantial surplus for the buyer. We demonstrate that optimal mechanisms require concealing the winning bid with a strictly positive probability.

show abstract

Optimal Cost Overruns: Procurement Auctions With Renegotiation

Cited by 23 publications

References 37 publications

Corruption Red Flags in Public Procurement: New Evidence from Italian Calls for Tenders

Corruption Red Flags in Public Procurement: New Evidence from Italian Calls for Tenders

Corruption Red Flags in Public Procurement: New Evidence from Italian Calls for Tenders

Sequential Procurement with Limited Commitment

Contact Info

Product

Resources

About