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Title: An ex ante bidding model to assess the incentive creation capability of a public-private partnership pipeline
Authors: De Clerck, Dennis
Demeulemeester, Erik
Issue Date: Nov-2014
Publisher: KU Leuven - Faculty of Economics and Business
Series Title: FEB Research Report KBI_1422
Abstract: The inherent risky nature of public-private partnerships requires contractors to make detailed and expensive project proposals. These high bidding costs are often seen as a burden for contractors to enter the playing field. Governments are seeking for ways to increase competition. It is a common belief that a project pipeline could succeed in triggering contractors’ enthusiasm. The goal of this paper is to theoretically assess whether the pipeline serves as an effective tool to levy the barrier to entry. Therefore, a theoretical model and a simulation experiment that mimics the tendering process with heterogeneity in the bidders’ cost structure are presented. In particular, the impact of a project pipeline on the ex ante bid preparation effort willingness and the targeted mark-ups is assessed. The Bayesian Nash equilibrium is heuristically approximated for scenarios with varying project characteristics. A statistical analysis of the experimental results approves that mark-ups are lower when more projects are included in the pipeline. As a consequence, this leads to fiercer price competition and a lower procurement cost for the government. Nonetheless, the incentive creation with respect to investment efforts is limited according to the experiment.
Publication status: published
KU Leuven publication type: IR
Appears in Collections:Research Center for Operations Management, Leuven

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