Essays on subcontracting, competitive bidding, and dynamic housing demand.

Abstract

The first essay quantifies and compares the impact of contractual incompleteness on subcontracting and in-house contracting costs. I examine 2,200 individual construction work items (i.e. drilling, concrete, traffic striping) on 32 bridge projects procured by the California Department of Transportation through competitive bidding. I use ex-post revisions to work item contracts to construct a measure of contractual incompleteness. I model strategic bidding behavior and derive a new structural approach to estimate costs from bids. The results show that contractual incompleteness raises procurement costs, up to 12% for subcontracted work. The effect for in-house work is much smaller. The results provide one of the first pieces of quantitative evidence supporting the incomplete contracting theories of the firm. In the U.S., macroeconomic policy makers are concerned about how consumers will respond to falling incomes, nominal home prices, falling income, rising mortgage interest rates and tightening credit standards. In the second essay, we estimate and simulate a dynamic structural model of housing demand. The model allows for realistic features of the housing market including non-convex adjustment costs from buying and selling a home and credit constraints from minimum downpayment requirements. We use the forward simulation procedure of Bajari, Benkard and Levin (2007) to estimate the structural parameters using data from the Panel Study of Income Dynamics. Given the estimated parameters, we simulate the partial equilibrium consumption and housing and financial asset accumulation response by consumers to negative income and home price shocks and a tightening of credit constraints. The simulation results demonstrate that many households do not adjust their stock of housing, but rather absorb the negative shocks by depleting home equity and reducing consumption. The intuition behind this result is simple---households only move two to three times before retirement. Because they are locked in, changes in housing market conditions do not influence their level of housing stock.