Final published version, 1.09 MB, PDF document
Available under license: CC BY-NC: Creative Commons Attribution-NonCommercial 4.0 International License
Research output: Working paper
Research output: Working paper
}
TY - UNPB
T1 - When can lotteries improve public procurement processes?
AU - Estache, Antonio
AU - Foucart, Renaud
AU - Serebrisky, Tomas
PY - 2022/7/31
Y1 - 2022/7/31
N2 - We study the feasibility, challenges, and potential benefits of adding a lottery component to standard negotiated and rule-based procurement procedures. For negotiated procedures, we introduce a “discrete lottery” in which local bureaucrats negotiate with a small number of selected bidders and a lottery decides who is awarded the contract. We show that the discrete lottery performs better than a standard negotiated procedure when the pool of firms to choose from is large and corruption is high. For rule-based auction procedures, we introduce a “third-price lottery” in which the two highest bidders are selected with equal probability and the project is contracted at a price corresponding to the third highest bid. We show that the third-price lottery reduces the risks from limited liability and renegotiation. It performs better than a standard second-price or ascending auction when the suppliers’ pool size, the risk of cost overrun, delays and non-delivery of the project are high. The choice between a second-price auction, a third price lottery and a lottery amongst all bidders also depends on the weight placed on producer surplus, including for instance the desire to increase the participation of local SMEs in public sector services markets.
AB - We study the feasibility, challenges, and potential benefits of adding a lottery component to standard negotiated and rule-based procurement procedures. For negotiated procedures, we introduce a “discrete lottery” in which local bureaucrats negotiate with a small number of selected bidders and a lottery decides who is awarded the contract. We show that the discrete lottery performs better than a standard negotiated procedure when the pool of firms to choose from is large and corruption is high. For rule-based auction procedures, we introduce a “third-price lottery” in which the two highest bidders are selected with equal probability and the project is contracted at a price corresponding to the third highest bid. We show that the third-price lottery reduces the risks from limited liability and renegotiation. It performs better than a standard second-price or ascending auction when the suppliers’ pool size, the risk of cost overrun, delays and non-delivery of the project are high. The choice between a second-price auction, a third price lottery and a lottery amongst all bidders also depends on the weight placed on producer surplus, including for instance the desire to increase the participation of local SMEs in public sector services markets.
KW - rules
KW - discretion
KW - procurement
KW - lotteries
KW - corruption
KW - auctions
M3 - Working paper
T3 - Economics Working Papers Series
BT - When can lotteries improve public procurement processes?
PB - Lancaster University, Department of Economics
CY - Lancaster
ER -