Cost overrun and auction format in small size public works

We study the effect on cost overruns of two different auction formats, the first price sealed bid and the average bid, conditional on whether entry is open or restricted. The first price format awards the contract to the lowest bid, while the average bid format awards the contract to the bid closest to the average of all the bids. This latter format is supposed to prevent an unreliable low bidder from winning the auction; as a consequence cost overruns should be lower under the average bid than under the first price format. We test this hypothesis with a panel data set of auctions held in the Italian Veneto region between 2004 and 2006, including small size public projects in sectors such as road works and building maintenance. We find that cost overruns are lower under the average bid format, but only when the entry is restricted. We then speculate on possible explanations for this result.

► We study the effect on cost overruns of first price and average bid auction formats. ► The analysis is conditional to the auction entry mechanism (open or restricted). ► We use a panel dataset of small public procurement auctions held in Italy. ► Cost overruns are lower only in auctions with average bid format and restricted entry.