Weak contract enforcement may reduce the efficiency of production in developing countries. I study how contract enforcement affects efficiency in procurement auctions for the largest power projects in India. I gather data on bidding and ex post contract renegotiation and find that the renegotiation of contracts in response to cost shocks is widespread, despite that bidders are allowed to index their bids to future costs like the price of coal. To study heterogeneity in bidding strategies, I construct a new measure of firm connectedness, based on whether a firm has been awarded coal concessions by the Government. Connected firms choose to index less of the value of their bids to coal prices and, through this strategy, expose themselves to cost shocks to induce renegotiation. I use a structural model of bidding in a scoring auction to characterize equilibrium bidding when bidders are heterogeneous both in cost and in the payments they expect after renegotiation. The model estimates show that bidders offer power below cost due to the expected value of later renegotiation. The model is used to simulate bidding and efficiency with strict contract enforcement. Contract enforcement is found to be pro‐competitive. With no renegotiation, equilibrium bids would rise to cover cost, but markups relative to total contract value fall sharply. Production costs decline, due to projects being allocated to lower‐cost bidders over those who expect larger payments in renegotiation.
We examine empirically the generalizability of internally valid micro-estimates of causal effects in a fixed population over time when that population is subject to aggregate shocks. Using panel data, we show that the returns to investments in agriculture in India and Ghana, small and medium non-farm enterprises in Sri Lanka, and schooling in Indonesia fluctuate significantly across time periods. We show how the returns to these investments interact with specific, measurable, and economically relevant aggregate shocks, focusing on rainfall and price fluctuations. We also obtain lower-bound estimates of confidence intervals of the returns based on estimates of the parameters of the distributions of rainfall shocks in our two agricultural samples. We find that even these lower-bound confidence intervals are substantially wider than those based solely on sampling error that are commonly provided in studies, most of which are based on single-year samples. We also find that cross-sectional variation in rainfall cannot be confidently used to replicate within-population rainfall variability. Based on our findings, we discuss methods for incorporating information on external shocks into evaluations of the returns to policy.