DP11708 Design of Public Procurement Auctions: Evidence from Cleaning Contracts

Author(s): Ari Hyytinen, Sofia Lundberg, Otto Toivanen
Publication Date: December 2016
Keyword(s): auction design, beauty contests, Entry, public procurement, scoring
JEL(s): D44, H57, P16
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11708

We analyze a regime change from beauty contests to first-price sealed-bid and scoring auctions, using data on public procurement of cleaning services in Swe-dish municipalities. In beauty contests, the lowest bid often lost and municipalities left substantial money on the table. The procurement costs were similar before and after the regime change, for two reasons: i) Entry strongly decreases the procure-ment cost, but did not change. Entry would have decreased with the regime change had the municipalities not adjusted the objects of auctions. ii) Municipali-ties were less price-sensitive and favored inhouse suppliers in the old regime, leading to more aggressive bidding by others. When the scope for favoritism re-duced, these changes balanced each other out. We discuss the implications of our findings for efficiency and welfare