Procurement Auctions, Firm Dynamics, and Infrastructure Costs

Lauren Mostrom, Finance PhD Student

Infrastructure costs in the US have risen consistently over the past several decades. Survey evidence addressing this phenomenon points to a lack of competition in procurement auctions as one driving force behind the increase in costs; however, at the same time, we have observed steady increases in the number of new entrants in the construction sector since 2010. In this project, I use an instrumental variables strategy to estimate the causal effect of additional entry in construction on the winning bid price for infrastructure projects. In doing so, I hope to shed light on which types of procurement auctions allocate projects to the most productive firms, and which auction types allocate projects irrespective of productivity. These findings will have important implications for understanding the steady decline in construction productivity, the rise in infrastructure costs, and the feedback effects of procurement auction structure on the distribution of construction firms.