Empirical Note on firm performance in government contract markets

Public construction and, in particular, highway construction account for a large proportion of the non-defense expenditures by the government. Con- tracts for highway construction are let almost exclusively through a sealed tender process. Competitive bidding is used to encourage price competition. There is, however, a problem in insuring that the bidder is able to deliver the product of specified quality and within a particular time period. Hence, in regulating such markets for product performance the bidding authority may wish to exclude bidders who cannot demonstrate that they are qualified to perform the specified service. In this paper, data from state highway departments are used to indicate the consequences of such exclusive policies in terms of market performance. The results obtained are consistent with traditional theory and present an interesting addition to the more specialized literature on participation of private firms in government markets.