Cost overrun and auction format in small size public works |
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| Institution: | 1. University of Verona, Dept. of Economics, Via dell''Artigliere 19, 3712 Verona, Italy;2. University of Padua, Dept. of Economics, Via del Santo 33, 35123 Padova, Italy;3. Generali Group, Via Marocchesa 14, 31021 Mogliano Veneto, Italy;1. Max Planck Institute of Economics, Kahlaische Str. 10, 07745 Jena, Germany;2. DSE, University of Verona, Via dell''Artigliere 19, Verona, Italy;3. Department of Economics, Lund University, P.O. Box 7082, 220 07 Lund, Sweden;1. Department of Economics, Bar-Ilan University, 52900 Ramat-Gan, Israel;2. Institute for Applied Microeconomics, University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany |
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| Abstract: | We study the effect on cost overruns of two different auction formats, the first price sealed bid and the average bid, conditional on whether entry is open or restricted. The first price format awards the contract to the lowest bid, while the average bid format awards the contract to the bid closest to the average of all the bids. This latter format is supposed to prevent an unreliable low bidder from winning the auction; as a consequence cost overruns should be lower under the average bid than under the first price format. We test this hypothesis with a panel data set of auctions held in the Italian Veneto region between 2004 and 2006, including small size public projects in sectors such as road works and building maintenance. We find that cost overruns are lower under the average bid format, but only when the entry is restricted. We then speculate on possible explanations for this result. |
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