An Econometric Identification of Abnormally Low Bids in the Procurement Market: Discriminant Analysis

Abstract

In the public construction procurement market, ‘abnormally low bids (ALB)’ are prevalent and they cause many social and economic problems. Also, when the procurement bids are colluded, ALB make the competitive price systematically underestimated. As many countries regulate ALB, their criteria to identify ALB are not homogenous. Most of the criteria are based on construction cost, which is usually inaccurate, vulnerable to accounting manipulation, and limited to the supply side information of the market. We propose an econometric identification process of ALB using a discriminant analysis. It is based on a general mixture model and easily estimable by MLE. We apply our method to Korean public construction bidding data from 2007 to 2016. The estimation results identify the determinants of the bid prices, along with the determinants of ALB, and presents a more accurate assessment of the collusion damage.

Publication
Submitted in Applied Economics