Finally, we turn to the work activity specific control variables. The estimates suggest that there are significant economies of scale. Unit costs are between 10–12% lower when road work activities cover a length of at least fifty km. This is close to an estimate by AFRICON (2008) who find that median unit costs are 15–20% lower for road contracts that are larger than fifty km. There is no evidence that estimated and contracted costs are different from actual costs.<sup>29</sup> Work activities undertaken by a foreign firm or joint venture compared to a local firm are on average 24–28% more costly. This could reflect a lack of competition: in environments where local firms are unable to compete, foreign firms have market power and can charge higher prices.<sup>30</sup> We do not find evidence that work activities that were financed by the World Bank or bilateral donors are more expensive compared to work activities financed by governments themselves.

We now turn to corruption in table 5. The pattern is consistent for the corruption variables from Transparency International and the Worldwide Governance Indicators. We find that Transparency International’s measure of corruption is significantly correlated with unit costs, so that a one point increase in corruption on a ten-point scale is associated with an increase in costs by about 7%. The WGI measure suggests that moving a country from the seventy-fifth percentile of corruption to the twenty-fifth percentile of corruption is associated with 6.8% lower unit costs. Unit costs in countries with a level of corruption above the should be largely absorbed into our work activity fixed effects.

> 29Unfortunately, data on the type of procurement is missing for more than half of the sample. For the unit costs for which we have data, the procurement was done by international competitive bidding in 62% of the cases, national competitive bidding in 36% of the cases, with the remaining work activities procured via single source selection, force account, or limited international bidding. We have also tried including a dummy variable that is equal to one if procurement was done via international competitive bidding and zero otherwise, as well as a dummy variable that is equal to one if we miss procurement information. The results suggest that work activities awarded through an international auction have 35-38% higher costs (significant at the 5% level) compared to national bidding process, single source selection, or force account. Alexeeva et al. (2008) find, when analyzing 109 contracts in thirteen Sub-Saharan African countries, that local firms have a cost advantage over international firms, likely due to lower management and overhead costs. However, local firms perform worse in the implementation of the project, including longer delays and higher cost overruns. We do not have data related to the implementation of the project, so we cannot test whether we find the same with our data.

> 30We would have liked to include a variable that measures the thickness of the construction sector in a particular country. Unfortunately, research on the construction industry in developing countries in the past two decades has been largely non-existent (Ofori 2007; Ofori 2011); as a consequence, apart from anecdotal evidence and a few country-level studies little is known with regard to the functioning of construction markets, number of players and the interaction between local and international firms. The general notion is that markets are thin with few large domestic firms which tend to be state-owned and a larger number of smaller firms (Kenny 2007).

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