Collaborative Research: Market Design in Public Procurement: Theory and Evidence

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Experts have estimated that approximately 15% of world output is accounted for by public sector procurement. Careful design of the procedures and methods used by the public sector in purchasing goods and services is therefore of primary importance for ensuring the efficient allocation of goods and services in the economy. This project investigates ways in which the public procurement process could be improved. The methodological approach is both theoretical and empirical, suggesting changes that in principle should yield better outcomes, and then analyzing the available data to analyze whether and by how much these proposals actually work in practice. The goals of this project are threefold: first, to characterize efficient award procedures and contract forms, and compare these to those used in practice; second, to develop and test models of contractor behavior under commonly used incentive structures; and third, to propose market design improvements, and to quantify the welfare gains from switching to these more efficient awarding and contracting procedures. The PIs conduct a detailed investigation of road construction projects in Minnesota, where detailed data is available from the Minnesota Department of Transportation. Minnesota has been experimenting with different award procedures that give contractors incentives for timely project completion, but there is little guidance from the academic literature on how best to specify the details of these procedures. This project will outline the requirements for efficient provision of time incentives and test whether the outcomes of the theory are observed in practice. It will also quantify how much commuters benefit from accelerated road construction - and thus smaller delays on the road - versus how much it will cost contractors in overtime and additional capital to accelerate the pace of construction. Broader impacts of this project include not just new empirical methods and graduate student training, but much better information to guide public procurement methods.