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Further econometric evidence on the extent and sources of cost savings in competitively tendered contracts

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Abstract

By estimating a flexible nonlinear regression model of savings on an original dataset of service procurements conducted by the Spanish Armed Forces, this paper provides robust and precise novel econometric evidence on the extent and sources of cost savings in public procurement. The net effect on savings of the policy-amenable and economically advantageous variables that we estimate, such as the size of the procured function, the importance of price in the contract award criteria, and the number of bidders who participate in the tendering, may help contracting agencies to select management practices and to forecast the price paid out. We find that savings increase proportionally to the size of the procured function, that an increase of 10 percentage points in the importance of price increases savings by approximately 2% of the function’s size, and that savings are generally reduced by restricting the number of bidders. A comparison with estimates reported in previous studies is also made.

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Notes

  1. http://ec.europa.eu/growth/single-market/public-procurement/index_en.htm.

  2. The study by Domberger et al. (2002) uses New Zealand Army data.

  3. A new public procurement law, which is a transposition of the EU procurement directives 2014/23/UE, 2014/24/UE, and 2014/25/UE, is expected to be passed in Spain by the end of 2017.

  4. When the contracting dossier value was difficult to pinpoint, there was overriding urgency, or a contract had previously been declared void, among other circumstances, the purchase could be negotiated with at least three potential providers.

  5. In the words of Carrick (1988), since competition stimulates the quest for better production methods, “the winning bidder usually acquired some unique insight on how to perform the contractual task.”

  6. As in the paper by Snyder et al. (2001), the fit in the savings regression was much better with the cost estimate entering in log form.

  7. The probit estimation included the above-mentioned explanatory variables as additional regressors, and its R-squared, calculated as one minus the ratio of the log likelihood of the fitted function to the log likelihood of a function with only an intercept, was .42.

  8. BIC is preferred to other popular information criteria when some modeling alternatives are nested (Nishii 1988). Granger et al. (1995) provide a critical assessment of model selection procedures based upon information criteria.

  9. As recommended by Drukker (2002) and Wilhelm (2008), the sampling distributions of the test statistics were approximated with the parametric bootstrap.

  10. Wooldridge (2010) calls (5) a semirobust variance matrix estimator, as it assumes correct specification of \(m\left( {\mathbf{x}_i ,{\varvec{\upbeta }};\lambda } \right) \).

  11. A total of 93 awarding committee meeting minutes (pertaining to the same number of procurements) were published in PLACE. The 11 among them which contain a request to justify prices took, on average, 10.9 weeks to award, whereas the other 82 took 6.0 weeks. Only in 2 cases was the winning bidder disqualified, which generated an 8% reduction in savings on average.

  12. A linear regression of the natural logarithm of the winning bid on the explanatory variables for savings revealed that having conducted five additional procurements is associated with a 0.4% increase of the winning bid.

  13. The variance of the difference between the two estimators was estimated using the paired bootstrap technique with 500 replications.

  14. The dummy variable for whether the contract will allow for extra payments is removed from \(\mathbf{x}\) because it was 1 in only two cases.

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Authors and Affiliations

  1. Centro Universitario de la Defensa de Zaragoza, Academia General Militar, Ctra. de Huesca, s/n, 50090, Zaragoza, Spain

    Jorge González Chapela & Luis A. Medrano

  2. Department of Economic Analysis II, National Distance Education University, Senda del Rey 11, 28040, Madrid, Spain

    José M. Labeaga

Authors
  1. Jorge González Chapela
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  2. José M. Labeaga
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  3. Luis A. Medrano
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Correspondence to Jorge González Chapela.

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Additional information

We are indebted to Andrés Magallón for invaluable advice throughout this project. Thanks also to Jorge Rosell for encouragement, and to two anonymous referees, Ricardo Bueno, Manuel García, Luis Lanchares, J. Carlos Soto, and seminar participants at the Department of Business Economics of the University of the Balearic Islands, the XXIV Public Economics Meeting, and the 34èmes Journées de Microéconomie Appliquée for helpful comments and suggestions. This research was supported by Centro Universitario de la Defensa de Zaragoza Grant 2015-06.

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Chapela, J.G., Labeaga, J.M. & Medrano, L.A. Further econometric evidence on the extent and sources of cost savings in competitively tendered contracts. Empir Econ 56, 679–701 (2019). https://doi.org/10.1007/s00181-017-1365-8

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  • DOI: https://doi.org/10.1007/s00181-017-1365-8

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