Easing Renegotiation Rules in Public Procurement: Evidence from a Policy Reform

Abstract

Public procurement contracts are necessarily incomplete and require frequent ex-post renegotiation. In this paper we first develop a stylized theoretical model of the effects of renegotiation policies on firms’ bidding strategies and, consequently, on the winning bids and final prices of contracts. We then use a Czech policy reform to empirically test the model’s predictions. Our findings show that (i) eased renegotiation rules lead to a decrease in the average winning bids; however, (ii) average final prices of contracts remain at the pre-reform level as the extra renegotiated price compensates for the drop in winning bids. We do not find convincing evidence of a decrease in productivity of the winning firms, but we do provide suggestive evidence of a change of contract allocation towards firms with higher bargaining power.