Subcontracting in Public Procurement: An Empirical Investigation

We have assembled a new dataset and we have empirically investigated the effects of subcontracting on the bidding price in auctions for the awarding of public contracts in Italy. The required qualification for firms aiming to bid for Italian public contracts determines different subcontracting formats: according to this system, bidding firms can be classified as either partially or fully qualified to complete a tendered project. The former are obliged to allocate certain tasks involved in the contract to other qualified firms, giving rise to a ÒmandatoryÓ subcontracting. The latter are free to choose whether or not to subcontract some tasks to similarly qualified firms, adopting an ÒoptionalÓ subcontracting. We find that firms in a position to choose whether to subcontract or not generally offer lower prices than those firms which must proceed with mandatory subcontracts. This result, which holds true after controlling for auction characteristics, firmsÕ fixed effects, and characteristics of the subcontract, indicates that firms apply different prices to different subcontracting strategies in the public procurement supply chain.