Underpricing in Social Infrastructure Projects: Combating the Institutionalization of the <i>Winner&#x2019;s Curse</i>

Abstract

Research examining underpricing in social infrastructure projects has been limited (e.g.,&nbsp;schools), yet this is a reality that confronts many governments worldwide. The upshot of underpricing is often contractual claims and delays, which can harm the social and economic well-being of citizens. Cognizant of experiencing potential cost overruns, this paper demonstrates that agencies within the Brazilian public sector institutionalized the winner’s curse to ensure their infrastructure projects did not exceed their budgets. This action resulted in contractors abandoning works before they were completed and, in doing so, being subjected to contractual sanctions. For the government agencies, this led to increased costs because an alternative contractor was required to complete works. The decision to accept a low bid, therefore, had the opposite of the desired effect because the final project costs exceeded their budgets. It is proposed that government agencies introduce an irresponsible bid threshold, which acts as a benchmark for determining a bid’s disqualification to address the winner’s curse phenomenon.