The new Brazilian public procurement law as promoter of the winner’s curse

Abstract

Avoiding overpricing and irresponsible pricing are two central objectives of the recently enacted Law 14133/2021. This article shows that when trying to achieve the first objective, the new Brazilian public procurement law promotes the second, since a specific command reduces maximum prices until they freeze to the lowest possible values, leading the contractors to the winner’s curse. Public officials are warned that maintaining this command will lead to widespread breaches of contracts and eventual bankruptcy of contractors. The Monte Carlo method is adopted to show that a comprehensive price database will avoid the problem and guarantee the effect intended by the law.

Keywords:
law 14133/2021; public procurement; winner’s curse; overpricing; irresponsible pricing