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Auctions vs negotiations in public procurement: which works better?


Lalive, Rafael; Schmutzler, Armin; Zulehner, Christine (2015). Auctions vs negotiations in public procurement: which works better? Working paper series / Department of Economics 209, University of Zurich.

Abstract

Public agencies mainly rely on two modes to procure goods and services: auctions and direct negotiations. We study a 1994 policy change in Germany that introduced the possibility to procure rail services in auctions as well as in direct negotiations with the incumbent. We analyze the effect of the procurement mode on service frequency and procurement price. Our analysis relies on self-collected data on the frequency of rail service on about 500 rail lines. We first develop a theoretical framework to study an agency’s decision on the procurement mode. We then use this framework to guide our empirical analysis on rail service, procurement price, and choice of procurement mode. Results indicate that, compared with negotiations, auctions improve service levels and reduce prices. As a result, surplus on auctioned lines increased by about 30%. Interestingly, surplus would also have increased by 16% on negotiated lines had auctions been used. We argue that the predominance of non-competitive modes reflects (actual or perceived) administrative costs of carrying out auctions.

Abstract

Public agencies mainly rely on two modes to procure goods and services: auctions and direct negotiations. We study a 1994 policy change in Germany that introduced the possibility to procure rail services in auctions as well as in direct negotiations with the incumbent. We analyze the effect of the procurement mode on service frequency and procurement price. Our analysis relies on self-collected data on the frequency of rail service on about 500 rail lines. We first develop a theoretical framework to study an agency’s decision on the procurement mode. We then use this framework to guide our empirical analysis on rail service, procurement price, and choice of procurement mode. Results indicate that, compared with negotiations, auctions improve service levels and reduce prices. As a result, surplus on auctioned lines increased by about 30%. Interestingly, surplus would also have increased by 16% on negotiated lines had auctions been used. We argue that the predominance of non-competitive modes reflects (actual or perceived) administrative costs of carrying out auctions.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D43, D44, R48
Uncontrolled Keywords:Auctions, negotiations, liberalization, passenger railways, public procurement
Language:English
Date:November 2015
Deposited On:01 Dec 2015 15:44
Last Modified:16 Aug 2017 15:18
Series Name:Working paper series / Department of Economics
Number of Pages:32
ISSN:1664-7041
Official URL:http://www.econ.uzh.ch/static/wp/econwp209.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers-new.php

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