Abstract
Public procurement contracts are necessarily incomplete and require frequent ex-post renegotiation. In this paper, we study how renegotiation rules affect the public procurement market.
We develop a theoretical model of the effects of renegotiation policies on firms' bidding strategies and, consequently, on the winning bids and final prices of contracts. We then use a Czech policy reform to empirically test the model's predictions.
Our findings show that (i) relaxed renegotiation rules lead to more aggressive bidding strategies and to a decrease in the average winning bids, however; (ii) average final prices of contracts remain at the pre-form level as the renegotiation compensates the drop in winning bids. Finally, we provide evidence that after the reform, more contracts were awarded to firms with a high propensity to renegotiate.