Construction Procurements during the 2008 Economic Crisis

Abstract

In this study, I examine how the 2008 economic crisis and resulting stimulus spending affected firms' costs and project prices paid by one state government, using data from highway construction procurements in Arizona. To fully investigate the extent of these effects, I develop a structural auction model that establishes an intertemporal link to firms' marginal costs (both participation and construction costs) by introducing dynamic synergies from bidding and winning auctions, i.e., the current costs can be decreased for the firms that bid (participated) or won in a previous period. The presence of bidding synergies can be explained by lower participation cost for a bidder who prepared a bid in the previous round. The potential explanation for winning synergies is the existence of synergistic and complementary tasks across multiple projects. The estimates show that bidding and winning synergies did exist and did affect firms' marginal costs. Moreover, cost estimates show that firms' construction costs were, on average, 5.4 percentage points lower during the crisis. Part of the reason for the cost reduction is that the stimulus resulted in frequent small projects, which encouraged many bidders to participate, thereby enjoying from bidding and winning synergies, and lowering costs.