Designing a public procurement strategy: lessons from local governments

Public sector procurement faces competing priorities, such as cost-efficiency, legal conformity, the advancement of environmental protection and the promotion of innovation. In addition, procurement departments are moving away from being mere organizational servants to having a strategic function. This paper looks at current public procurement strategy research, revealing neglected aspects. The authors propose a new analytical framework and suggest avenues for future research.     

Sequential auctions: theory and evidence from the Seattle Fur Exchange

We develop a model that incorporates salient features of the Seattle Fur Exchange: identical lots of furs are auctioned sequentially, bids must be raised by specified increments, and the winner of a lot has the privilege of beginning the bidding on the subsequent lot. Predictions of the theory are consistent with the data. Revenue implications of the theory are also explored.     

Collusion in uniform-price auctions: experimental evidence and implication for treasury auctions

We provide experimental evidence that nonbinding preplay communicationbetween bidders in auctions of shares facilitates the adoptionof equilibrium strategies: collusive strategies in uniform-priceauctions, and the unique equilibrium in undominated strategiesin discriminatory auctions. When communication between biddersis introduced, clearing prices and auctioneer profits in uniform-priceauctions fall below those observed in discriminatory auctions.This evidence suggests that uniform-price auctions of Treasurysecurities may result in lower revenues than the currently employeddiscriminatory procedure.     

Procurement under public scrutiny: auctions versus negotiations

We compare two commonly used mechanisms in public procurement: auctions and negotiations. The execution of the procurement mechanism is delegated to an agent of the buyer. The agent has private information about the buyer's preferences and may collude with one of the sellers. We provide a general characterization of both mechanisms based on public scrutiny requirements and show—contrary to conventional wisdom—that an intransparent negotiation always yields higher social surplus than a transparent auction. Moreover, there exists a lower bound on the number of sellers such that the negotiation also generates a higher buyer surplus.     

Debate: Cutback management through public procurement

The policy of contestability has become an important policy in relation to the delivery of public services. This article describes the theoretical underpinnings of contestability and its application to public services in the UK. It discusses the necessary conditions for achieving effective contestability and extending the application of contestability in public service provision.     

Not all call auctions are created equal: evidence from Hong Kong

On 25 March 2002, the Hong Kong Exchanges and Clearing Ltd (HKEx) introduced an opening call auction. This trading mechanism is designed to facilitate price discovery in the presence of asymmetric information at the market open, increasing opening price efficiency. The design of the HKEx differs significantly from opening auctions in other markets. Contrary to previous research, the results indicate a decrease in market quality following the introduction of the opening call auction. This decline is largest in the less actively traded stocks.

Contracting with limited commitment: evidence from employment-based health insurance contracts

Impediments to worker mobility serve to mitigate the attrition of healthy individuals from employer-sponsored insurance pools, thereby creating a de facto commitment mechanism that allows for more complete insurance of health risks than would be possible in the absence of such frictions. Using data on health insurance contracts obtained from the 1987 National Medical Expenditure Survey, we find that the quantity of insurance provided is positively related to the degree of worker commitment. These results illustrate the importance of commitment in the design of long-term contracts, and provide an additional rationale for the bundling of health insurance with employment.     

What makes a joint venture: Micro‐evidence from Sino‐Italian contracts

This paper provides new contract-level evidence on control rights allocation in order to define what makes a joint venture. Property rights theory of the firm identifies circumstances under which joint control alleviates investment distortions due to contract incompleteness. We compare predictions of the theoretical literature with actual governance structures of Sino-Italian joint ventures, as reported in a questionnaire submitted to the entire population of Italian enterprises operating in China. With an exceptional response rate of 60%, our evidence confirms most of the theoretical predictions and helps select among competing approaches to model joint ventures.     

Immigration and the pattern of public spending: evidence from OECD countries

Using a panel of OECD countries, we show that immigration systematically alters the composition of public spending in the destination country. To mitigate bias from the endogenous sorting of immigrants, we use an IV estimation strategy. The instrument is constructed by estimating a bilateral migration model for 24 destination and 208 source countries. We find that the host country responds to the increase in immigrants by adjusting various expenditures, such as by reallocating resources from social welfare to national defense and public order. Our findings imply that (1) immigration affects policy outcomes in areas with a low ethnic or redistributive dimension and (2) immigration may have an insubstantial effect on the total size of government.

     

Auditor monitoring and verification in financial contracts: evidence from earnouts and SFAS 141(R)

We study how monitoring and verification of accounting-based performance benchmarks influences the design and efficiency of earnout contracts. Earnouts are commonly used to resolve agency conflicts arising in mergers and acquisitions, but these contracts create measurement and other agency problems when contingent payments are tied to future accounting-based performance. Exploiting changes in auditor monitoring of earnouts that arose as\ a consequence of SFAS 141(R), we find that acquisition contracts are more likely to incorporate accounting-based earnouts and that contingent payments tied to accounting-based performance benchmarks make up a larger portion of the consideration when acquiring firms have high-quality auditors. We also find that market reactions to announcements of earnout deals are more positive after SFAS 141(R) for acquisitions most susceptible to disputes over accounting-based performance metrics and these results are more pronounced for acquiring firms with high-quality auditors. By exploiting the features of this unique setting, we illuminate the role of monitoring and verification of accounting information in financial contracts.     

The certification value of private debt renegotiation and the design of financial contracts: Empirical evidence from Europe

By using a sample of bank loan renegotiations by European firms, I show that the renegotiation of financial contracts bears a certification value, while deeply changing the contractual features of the loan over time, to the benefit of shareholders. I find that amendments to financial covenants and to loan amounts increase the cumulative abnormal returns of a borrowing firm by 10–15%. Early and less frequent renegotiations of bilateral loans with short maturities also imply a positive stock market reaction. Amendments signaling the early accrual of new and positive information allow increasing firm value.     

Design and valuation of debt contracts

This articles studies the design and valuation of debt contractsin a general dynamic setting under uncertainty. We incorporatesome insights of the recent corporate finance literature intoa valuation framework. The basic framework is an extensive form game determined bythe terms of a debt contract and applicable bankruptcy laws.Debtholders and equityholders behave noncooperatively. The firm'sreorganization boundary is determined endogenously. Strategic debt service results in significantly higher defaultpremia at even small liquidation costs. Deviations from absolutepriority and forced liquidations occur along the equilibriumpath. The design tends to stress higher coupons and sinkingfunds when firms have a higher cash payout ratio.     

Central-local government fiscal relations and cyclicality of public spending: evidence from China

In this study, we analyze how fiscal decentralization affects the cyclicality of government spending. We focus on China, which experienced fiscal decentralization during 1979–1993 and then partly centralized its revenue with the 1994 fiscal reform. By employing both time series and province-level panel data, we show that Chinese provincial and total government spending was strongly procyclical during the decentralization period before the reform, but both became significantly less procyclical with respect to nationwide output fluctuations after the reform. We suggest several channels through which the procyclicality of subnational government spending in decentralized fiscal federations could be restrained. We further find that less procyclical provincial government spending is associated with smaller output volatility.     

Local preferencing for local suppliers: examining the use of locality in public procurement

The academic literature on the selection of suppliers for public contracts, while vast, lacks attention when examining the use of local suppliers. Benefits of local suppliers have been discussed with respect to local economies, but the actual selection of these suppliers has been largely ignored. This paper examines the choice of local suppliers when there is an explicit desire for public procurement agencies to cater to minority-owned and emerging small businesses. The paper provides important insight into local supplier selection, while opening new avenues of future research into the role these suppliers play in the supply chain.     

Earnings management of initial public offering firms: evidence from regulation changes in China

Discretionary current accruals of Chinese initial public offering (IPO) firms decreased after the abolition of fixed‐price offering systems that directly linked offering price to reported earnings. Results suggest IPO firms that decrease managerial ownership manage earnings upward during the fixed‐price offering period, but this relationship disappeared after the introduction of a book‐building system. We also find that bank debt is negatively related to discretionary current accruals during the fixed‐price offering period, but no relation exists for the book‐building period. Leverage has a significant positive relationship with earnings management. However, this finding is potentially attributable to nonoffering price objectives or endogeneity biases.     

Determinants of biased subjective performance evaluations: evidence from a Taiwanese public sector organization

Drawing on the notion of guanxi, which is obligation-bound, in Confucian cultures, this study investigates whether rating leniency and rating compression in performance evaluation are based on supervisor–subordinate acquaintanceship, alma mater ties, and subordinates' physical proximity to their supervisor. After controlling for supervisor–subordinate gender similarity and age difference, this study first finds that public sector supervisors are willing to provide relatively lenient ratings and compressed ratings for their subordinates when their personal acquaintanceship with them is strong, and when there is close physical proximity between them. Second, an alma mater connection with a subordinate leads to rating leniency by the supervisor. Finally, it is worth noting where this study differs from Bol's research (from Western cultures). In particular, while Bol, J.C. [2011. The determinants and performance effects of managers’ performance evaluation biases. The Accounting Review, 86 (5), 1549–1575] demonstrates that age differences between supervisors and subordinates decrease rating leniency, this study documents insignificant results for similar demographic characteristics in age and gender. Bol, J.C. [2011. The determinants and performance effects of managers’ performance evaluation biases. The Accounting Review, 86 (5), 1549–1575] also demonstrates that if a private sector supervisor sharing a work location with subordinates faces relatively lower information-gathering costs, he or she will give less lenient and less compressed ratings. However, this study shows opposite findings for the guanxi norm in Confucian societies.     

Signalling and the design of delegated management contracts for public utilities

We analyze the shape of contracts between local governments and the contractors they hire to run public facilities on their behalf. Governments are privately informed about the quality of the facility, while risk‐neutral contractors undertake a nonverifiable operating effort. The design of the contract signals the quality of the facility in such a way that the better this quality, the greater the share of operating risk kept by the government. This feature reduces the agent's marginal incentives, creating a tradeoff between signalling and moral hazard. We provide extensions of our framework in several directions, allowing for risk aversion on the agent's side, double moral hazard, and political delegation. The model is supported by some stylized facts from the water industry.