Cognitive Biases in Government Procurement – An Experimental Study
10(2) Review of Law and Economics (2014) 169-200
33 Pages Posted: 9 Jun 2015
Date Written: August 1, 2014
Competitive bidding (CB) is the dominant governmental contracting mechanism by which hundreds of billions of dollars are allocated annually. We claim that when bid evaluators assess the qualitative components of competing bids while being exposed to the bid prices, a systematic bias occurs that gives an unjust advantage to the lower bidder. We term this the Lower-Bid Bias. It is then shown that this bias can be neutralized by splitting the evaluation process into two stages, whereby bid price is revealed only after the evaluation process has culminated (two-stage CB). This is demonstrated through the findings of a survey and three controlled experiments, the first to be conducted with procurement officials. We also explain why this bias is undesirable and suggest a mandatory rule, requiring two-stage CB for any competitive public procurement based on evaluation criteria other than price. Further applications of the experiments' findings are also discussed.
Keywords: public procurement, behavioral economics, cognitive bias, competitive bidding
JEL Classification: D73, H11, K00, K23
Suggested Citation: Suggested Citation