On the packaging of infrastructure projects in a competitive bidding environment

Abstract

Theory predicts that bundling should dominate unbundling in transportation infrastructure procurement contracts, yet in practice unbundling is common. We present a model with equilibria where unbundling is superior to bundling, with competitive bidding between many firms to obtain the different contracts, and two layers of private information: Firms have low or high building costs, and builders have private information on infrastructure quality. When this information cannot be inferred by other firms, good builders can outbid others during the operation auction and anticipate positive expected payoffs. Bidding for a bundled project, however, may erase the winner’s profit, yielding a worse outcome than under unbundling.