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Keywords:

  • auction;
  • competition effects;
  • procurement auctions;
  • road construction;
  • official development assistance;
  • C31;
  • D44;
  • H57;
  • L31

Abstract

Auctions have been recognised as an important tool for improving economic efficiency. Aid-related procurement systems are no exception to this. Strengthening competition at procurement auctions lowers contract prices and mitigates the heavy indebtedness of developing countries. Auctions are also instrumental in developing local business and fostering good governance. Using data on procurement auctions for Asian Development Bank-assisted highway projects in China, the equilibrium bid function is estimated. The data indicate that two factors may exert different influences on the equilibrium bid. A common expectation that economies of scale in road construction could lower the average cost of constructing relatively long roads encourages firms to bid aggressively, independently of the degree of auction competition. On the other hand, a pro-competitive effect would be observed only as the number of bidders exceeds eight. Copyright © 2007 John Wiley & Sons, Ltd.