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Auctions vs negotiations in public procurement: which works better?


Lalive, Rafael; Schmutzler, Armin (2011). Auctions vs negotiations in public procurement: which works better? CEPR Discussion Papers 8538, Centre for Economic Policy Research.

Abstract

Public agencies rely on two key modes to procure goods and services: auctions and direct negotiations. The relative advantages of these two modes are still imperfectly understood. This paper therefore studies public procurement of regional passenger railway services in Germany, where regional agencies can use auctions and negotiations to procure regional passenger rail services. This offers the unique opportunity to assess the two procurement modes within the same institutional and legal framework. We first characterize the decisions of the agency in a simple reduced form framework of negotiations and auctions. This analysis suggests accounting for the endogeneity of the choice of procurement mode by estimating the mode of procurement, quantity and price simultaneously. We then test this framework using information on lines that were auctioned and lines that were directly negotiated with the former monopolist. Results indicate (i) endogeneity of procurement choice can be fully characterized by observed line characteristics;(ii) frequency of service is 16 percent higher on lines that were auctioned compared to lines that were negotiated, and (iii) the procurement price is 25 percent lower on auctioned lines than on those with direct negotiations. Taken together, these results indicate a significant efficiency enhancing effect of auctions.

Abstract

Public agencies rely on two key modes to procure goods and services: auctions and direct negotiations. The relative advantages of these two modes are still imperfectly understood. This paper therefore studies public procurement of regional passenger railway services in Germany, where regional agencies can use auctions and negotiations to procure regional passenger rail services. This offers the unique opportunity to assess the two procurement modes within the same institutional and legal framework. We first characterize the decisions of the agency in a simple reduced form framework of negotiations and auctions. This analysis suggests accounting for the endogeneity of the choice of procurement mode by estimating the mode of procurement, quantity and price simultaneously. We then test this framework using information on lines that were auctioned and lines that were directly negotiated with the former monopolist. Results indicate (i) endogeneity of procurement choice can be fully characterized by observed line characteristics;(ii) frequency of service is 16 percent higher on lines that were auctioned compared to lines that were negotiated, and (iii) the procurement price is 25 percent lower on auctioned lines than on those with direct negotiations. Taken together, these results indicate a significant efficiency enhancing effect of auctions.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D43, D44, R48
Uncontrolled Keywords:Auctions, liberalization, negotiations, passenger railways and public procurement
Language:English
Date:August 2011
Deposited On:21 Jan 2015 15:19
Last Modified:08 Dec 2017 10:57
Series Name:CEPR Discussion Papers
Number of Pages:33
ISSN:0265-8003
Official URL:http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8538#

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