Social and Behavioral Sciences Commons^™

Horizontal Subcontracting In Procurement Auctions, Nancy Huff

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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 …