Expiring budgets and dynamic competition in year-end public auctions : theory and evidence from Chile

Abstract

Data from Chile's public procurement system shows that auctions become less competitive toward the end of the scal year as the number of tenders increases because of use-it-or-lose-it budget provisions. A dynamic price-competition model with capacity constraints rationalizes this nding and has additional predictions that are con rmed by the data. In particular, rms infer a less competitive environment by the end of the year and frequently set their bids around the price cap. This result is driven by the possibility of becoming a single-bidder when competitors exhaust their capacity. Additionally, high-capacity rms usually skew their victories toward the end of the year, while smaller rms win more tenders in earlier periods.