Bidding performance of firms in public work tenders: a stochastic frontier approach

Abstract

This paper seeks to analyze firms’ bidding performance in public works tenders called in the Asturias (Spain) between 2007 and 2010. For these purposes, a model including several variables regarding features of tender and contractors is estimated by OLS. The estimated coefficients suggest that tenders which involve larger public works or that award them by a simple lowest-bid auction are associated with higher discounts, as are firms which use its usable capacity more intensely. Additionally, differences in bidding before and after the outbreak of the economic crisis in Asturias in 2009 can reach about 13 percentage points. Then a stochastic frontier model is estimated, from which efficiency scores for each tender are calculated in order to elucidate bidding performance. A simple approximation suggests that 61.9 million euros could have been surcharged to the public purse between 2007 and 2010 due to market power inefficiency. Finally, a number of policy recommendations which are consistent with existent bidding literature are provided.