Date of Award

5-2012

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Legacy Department

Economics

Advisor

Maloney, Michael T

Committee Member

Thomas , Charles J

Committee Member

Miller , Daniel P

Committee Member

Sauer , Raymond D

Abstract

A firm submitting a bid in a procurement auction is sometimes also listed as a subcontractor in one or more competing bids. This paper theoretically and empirically examines how such horizontal subcontracting affects welfare and price competition. I first specify a model of horizontal subcontracting which endogenizes the roles of the subcontracting firms as well as a negotiated payment for subcontracted work. The model shows that horizontal subcontracting always weakly increases welfare by enabling more efficient allocation of production but has two opposite effects on price competition: an efficiency effect and a strategic effect. The efficiency effect arises when firms use the subcontract to lower production costs and submit lower bids. However, horizontal subcontracting can soften competition by allowing strategic firms to raise each other's opportunity costs of winning the auction, producing higher bids. I find empirical support for the model's implications using detailed data collected from highway procurement auctions in California. I find that strategy-driven horizontal subcontracts yield 6% higher prices relative to efficiency-driven horizontal subcontracts.

Included in

Economics Commons

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