American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Competition under Incomplete Contracts and the Design of Procurement Policies
American Economic Review
(pp. 535–81)
Abstract
We study the effects of intensifying competition for contracts in the context of US Defense procurement. Leveraging a discontinuous regulation that mandates agencies to publicize certain contract opportunities, we document that expanding the set of bidders reduces award prices but deteriorates post-award performance in terms of cost overruns and delays. We develop and estimate an auction model with endogenous entry and stochastic execution performance, in which the buyer endogenously chooses the intensity of competition. Model estimates indicate substantial heterogeneity in performance across contractors and show that simple adjustments to the current regulation could provide significant savings in procurement spending.Citation
Carril, Rodrigo, Andres Gonzalez-Lira, and Michael S. Walker. 2026. "Competition under Incomplete Contracts and the Design of Procurement Policies." American Economic Review 116 (2): 535–81. DOI: 10.1257/aer.20221345Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- D24 Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- D44 Auctions
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory
- H56 National Security and War
- H57 National Government Expenditures and Related Policies: Procurement