Subcontracting in Public Procurement: an empirical investigation

We assemble a new dataset to empirically investigate subcontracting in Italian public procurement. We use provisions of the pre-qualication system to disentangle two types of subcontracting. Under the provisions of this system, bidders in the auctions that award public contracts can be classied as either partially or fully qualied to execute the tendered project. Partially qualied bidders are required to find qualied subcontractors to execute part of the work (i.e. legally required subcontracting), while fully qualied bidders can freely choose whether to subcontract (i.e. voluntary subcontracting). We capture the effect of the terms of the subcontract on the firms' bids. We find that firms that subcontract by choice offer, on average, higher rebates (i.e., lower prices) than firms that are legally required to outsource. This result, which holds true after controlling for auction characteristics, firm fixed-effects, and subcontracting characteristics, indicates that firms discount their potential subcontracting position when they bid on rebates. Moreover, because subcontracting by choice and by law in the context of our study determines the role of horizontal and vertical outsourcing, our analysis provides the first test of these strategies in the public procurement supply chain.