Winning by Default: Why is There So Little Competition in Government Procurement?

Abstract

Government procurement contracts rarely have many bids, often only one. Motivated by the institutional features of federal procurement, this paper develops a principal-agent model where a buyer seeks sellers at a cost and negotiates contract terms with them. The model is identified and estimated with data on IT and telecommunications contracts. We find the benefits of drawing additional sellers are significantly reduced because the procurement agency can extract informational rents from sellers. Another factor explaining the small number of bids is that sellers are relatively homogeneous, conditional on observed project attributes. Administrative hurdles and corruption appear to play very limited roles.

Targeted Bidders in Government Tenders

“…They find that increasing buyers' discretion on winner selection has a neutral and sometimes even positive effect on procurement outcomes, although it increases the chances of the same firms winning again. Kang and Miller (2022) observe little competition in US federal procurement auctions and, in line with Coviello et al (2017), find an increase in costs when public officials' discretion is reduced. Calzolari and Spagnolo (2009) provide a theoretical background to explain these empirical results.…”

Buyers' role in innovation procurement: Evidence from US military R&D contracts

“…The substantial increase in cost, paired with relatively small delays, is explained by the cost‐plus nature of most of the contracts (79%). The preponderance of cost‐plus contracts in DoD procurement is well documented (Carril & Duggan, 2018; Kang & Miller, 2017). It is explained by the DoD's interest to obtain a timely completion of projects that have highly uncertain costs at the time of bidding 13 .…”

“…The data covers all federal contracting offices' transactions over $3000. They have been used extensively in previous research, including studies byLiebman and Mahoney (2017),Warren (2014),Kang and Miller (2017),Giuffrida and Rovigatti (2018),Decarolis et al (2021).10 The R&D code specified in each contract comes from the variable "Product or Service Code" and is composed of two alphabetic and two…”

“…The data covers all federal contracting offices' transactions over $3000. They have been used extensively in previous research, including studies by Liebman and Mahoney (2017), Warren (2014), Kang and Miller (2017), Giuffrida and Rovigatti (2018), Decarolis et al (2021).…”

Contract Renewal in Urban Water Services, Incumbent Advantage, and Market Concentration

“…In the case of the construction of social housing in France, Chever, Saussier, and Yvrande-Billon (2017) found that negotiations after an informal auction led to lower costs than those following open auctions. Kang and Miller (2015) developed a procurement auction model in which the degree of competition is optimally chosen by public buyers, finding that limiting competition does not necessarily result in higher procurement costs.…”