COLLUSION IN PRIVATE PROCUREMENT: HOW DOES MANDATORY BUILDING REPAIR INCREASE RENOVATION PRICES?

Abstract

This paper studies a regulatory change that significantly increases the prices of residential building renovation. In Hong Kong, where most people live in high-density condominiums, owners’ corporation arranges tender process to choose contractors on behalf of all homeowners when common areas of a building need maintenance and repair. Since 2012, the government has mandated selected buildings to finish such renovations within a year. Using propensity score matching method, we find that homeowners who received statutory notices to repair their building paid 40% more in bid price compared with those who did it voluntarily. After the mandatory scheme was introduced, all homeowners on average paid 40% more, and those who received the notices paid even higher prices. Moreover, these increases in prices are more pronounced in districts where condominiums are more expensive and residents are more educated. Finally, the major contractors’ bids became more correlated after the introduction of the mandatory scheme, suggesting that the scheme may have helped promote bid-rigging and corruption among contractors and owners’ corporations.