In Short:

Price increases over the past decade are primarily attributable to increasing markups, not increasing production costs. Limited competition, in turn, is consistent with patterns generated by fixed costs of entry, but not broad construction-sector fixed costs.

Abstract

Can limited competition in procurement auctions explain the high, and rising, price of road infrastructure in the U.S.? I assemble a new dataset covering the near-universe of state highway auctions between 2002 and 2024. I first document thin competition: one- or two-bidder auctions account for a third of awards, and this share has risen over the past decade. Using spatial variation in inter-state bidder locations, I then estimate the average causal effect of competition on prices; an additional bidder reduces prices by ten percent. To decompose bids in the data into markups and production costs, I develop a semi-parametric structural auction model that incorporates bidders’ uncertainty over the number of competitors they face. I show that price increases over the past decade are primarily attributable to increasing markups, not increasing production costs. Limited competition, in turn, is consistent with patterns generated by fixed costs of entry, but not broad construction-sector fixed costs. Embedding the markup estimates in an entry model, I estimate large auction and market entry costs, consistent with an important role for procurement complexity and regulatory barriers.

About the author

Lindsey Currier

incoming assistant professor, school of government and policy

Lindsey Currier is a PhD candidate in Economics at Harvard University. Currier’s research focuses on urban economics, industrial organization, and public economics, with a particular interest in transportation and infrastructure.