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Quality Incentives in Auctions for Construction Contracts
International Journal of Industrial Organisation
Construction projects are frequently awarded on the basis of auctions. The winning project is selected not only on the basis of price, but also a variety of quality characteristics. Coming up with a high-quality project may require (substantial) up-front investments. This paper studies the relative weight the auctioneer should attach to quality when selecting the winning project. It is shown that the optimal weight may be substantially higher than his own marginal utility of quality. As a result it may be quite difficult to detect favouritism in the process of selecting the winner.
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