Contractual Requirements and Bidding Behavior in Public Procurement With Entry

ABSTRACT We combine theoretical and empirical analyses to investigate the impacts of contractual requirements on bidding behavior and competition in procurement auctions with endogenous entry. Our analysis demonstrates that contractual requirements affect expected payoffs, influencing the equilibrium number of bidders and their bids under zero‐profit conditions. Specifically, in equilibrium, increased contractual requirements enhance competition by raising bidders' expected payoffs, while higher entry costs reduce competition. Overall, a rise in entry costs results in elevated equilibrium bids. Under certain conditions, an increase in contractual requirements raises equilibrium bids. Additionally, we emphasize the significance of enforceability in shaping bidding behavior and, thus, in policy implementation. Empirical evidence from public cleaning services procurement in Sweden supports the implications of our model.