FIRM BIDDING BEHAVIOR IN HIGHWAY PROCUREMENT AUCTIONS: AN ANALYSIS OF SINGLE-BID CONTRACTS, TACIT COLLUSION, AND THE FINANCIAL IMPACT ON KENTUCKY

Recently, the American Association of State Highway and Transportation Officials (AASHTO) indicated lack of competition and single-bid contracts in asphalt paving as a major issue facing state transportation departments. Single-bid contracts indicate a lack of competition which increases costs to state and local governments. During the period from 2005-2007 in Kentucky, 42 percent of all bids were awarded with only one firm bidding on the project. Of the asphalt paving jobs, 63 percent of those jobs were awarded to a single bidder. The analysis of this dissertation focuses on detecting tacit collusion in asphalt paving jobs in Kentucky. A focal point enables firms to coordinate bids and engage in a tit-for-tat strategy where they refuse to bid in each other’s counties. In this case the focal point is the county boundaries. Two factors contribute to the ability of firms to use county boundaries to coordinate bids. The first factor is that the political county boundaries form relatively small counties which allow a firm’s service area to cover multiple counties. The firms are able to claim counties and service the projects in those counties. The second factor is that a majority of asphalt projects which the Kentucky Transportation Cabinet puts up for bidding are exclusive to a specific county. This allows firms to know whether a project falls in a county within their bidding territory. Each county and firm in each of the 12 Kentucky Transportation Cabinet geographic districts was analyzed to see if there was evidence of bid coordination. The result is that in 94 out of 120 counties there was evidence of bid coordination or tacit collusion with increases in bid levels. There is evidence that 25 of the 31 Kentucky asphalt paving firms refuse to bid against their rivals in their rival’s territories. This refusal by firms to bid against each other resulted in single-bid contracts that were $70,595,466.09 above the competitive level