growth to remain under the privileged regime). Probably the greatest risk of any such discriminatory policy is that it can lead to undue discrimination and corrupt groups can capture or abuse it. Any such cost and risk, however, should be set against the declared policy goals of increasing access for some bidder groups which unfortunately is typically not systematically done (OECD, 2012).

# _b) Evidence_

There is high quality evidence for developed countries on the effect of SME preferences; however, there is only scant evidence for developing countries or on the other major policy goals such as gender, green and innovative procurement.

In a series of high quality quantitative research papers on US and Japanese data, authors directly model the effect of SME-preferences on bidders’ choice of whether to bid as well as the probability of winning with sophisticated analytical techniques for estimating company profitability too (Krasnokutskaya & Seim, 2011; Marion, 2007; Nakabayashi, 2013). This literature equivocally finds that under optimal policy design and sufficient bidder pool production costs go up due to SME preferences, however this efficiency loss is more than offset by increasing competition lowering prices. For example, in the Japanese construction sector in 2005-2009, the SME preference program decreased overall procurement costs by about 0.10%0.23% according to diverse model estimates (Nakabayashi, 2013). Such positive overall effect depends on the productivity differences between SMEs and large firms, the two groups’ propensity to bid as a function of SME preferences, capacity constraints in the industry, and allocative efficiency losses due to knock-on effects to auctions where no preferences apply. Most relevantly for policy makers, even under sub-optimal preference regime scenarios, the overall cost of preferences seem to be low, for example in Californian road construction tenders a 5% bid preference for SMEs (i.e. higher evaluation scores for SMEs) resulted in a 3.6% economic loss due to less productive bidders winning (Marion, 2007).

In sum, while the quality of evidence is high for SME preferences in developed economies, more research needs to be done in developing countries where institutional and market conditions substantially differ. In addition, none of the discussed studies could estimate the long-term effects on firm investment decision and market dynamics which may decrease or increase overall costs. Finally, the lack of noticeable evidence on preferences for sustainable and innovative products leaves policy makers wonder about whether such policies do more good than harm.

# 5. <u>Award mechanism and auction design</u>

# _a) Theory_

The group of policy interventions under the heading “award mechanism and auction design” encompass the decision rule applied (e.g. lowest bid) and the types of criteria taken into account (e.g. price or past performance) when comparing bidders and determining the winner. They may also include more detailed award mechanism characteristics for example whether prices or technical specifications are assessed first in the scoring process (Blancas et al., 2011). Procurement systems have a wide variety of policies in place in these regards with significant shifts occurring in the last decades, for example, the move from average bid auction (i.e. the bid closest to the average of the submitted bid wins) to lowest bid auctions in Italy in the 2000s.

Award mechanisms received extensive theoretical and empirical discussion with two particular designs most frequently discussed: average bid auctions and first price sealed bid auctions (i.e. bidders simultaneously submit their bids without knowledge of other bids and the lowest price bidder wins) (Lengwiler & Wolfstetter, 2006 part IV). The argument for average bid auctions is that they soften price competition and select the bidder which most accurately estimated the production costs of the procured products which in return decrease cost overruns and delays in the contract execution stage. However, the 16