Competition under Incomplete Contracts and the Design of Procurement Policies
Rodrigo Carril, Andres Gonzalez-Lira, Michael S. Walker
American Economic Review · 2026 · Volume 116 · Issue 2
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.
Keywords
Firm Behavior: Empirical Analysis, Production, Cost, Capital, Total Factor, and Multifactor Productivity, Capacity, Auctions, Asymmetric and Private Information, Mechanism Design, Economics of Contract: Theory, National Security and War, National Government Expenditures and Related Policies: Procurement
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