A political economy analysis of preferential public procurement policies (original) (raw)
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Chapter 1. Primer on protectionism in public procurement markets.
This chapter offers a primer for non-economists regarding the reason why public procurers discriminate against foreigners (including foreign goods/services as well as foreign suppliers/contractors) to the detriment of domestic welfare and in so doing presents the neoclassical premises for this research project. Its purpose is to explain the basic relations between (i) public procurement and trade by demonstrating the size of public procurement markets and their exposure to trade and protectionism, and (ii) regulation of public procurement processes and the requirements of trade. This chapter also briefly introduces the concept of 'horizontal policies' in public procurement and suggests that their primary function is to accommodate sophisticated protectionism practices. (...)
Fine-Tailored for the Cartel-Favoritism in Procurement
Review of Industrial Organization, 2009
In this paper, we investigate the interaction between two firms, which are involved in a repeated procurement relationship modeled as a multiple criteria auction, and an auctioneer (a government employee) who has discretion in devising the selection criteria. Our main result is that favoritism substantially facilitates collusion. It increases the gains from collusion and contributes to solving basic implementation problems for a cartel of bidders operating in a stochastically changing environment. A most simple allocation rule where firms take turns in winning, independently of stochastic social preferences and firms' costs, achieves full cartel efficiency (including price, production and design efficiency). In each period the selection criteria is fine-tailored to the in-turn winner: the "environment" adapts to the cartel. This result holds true when the expected punishment is a fixed cost. When the cost varies with the magnitude of the distortion of the selection criteria (compared to the true social preferences), favoritism only partially shelters the cartel from the environment. We thus find that favoritism generally facilitates collusion at a high cost for society. Our analysis suggests some anti-corruption measures that could be effective in curbing favoritism and collusion in public markets. It also suggests that the much-advocated rotation of officials is likely to be counter-productive.
Promoting fair competition in public procurement
Journal of Public Economics, 1995
If a government cares for local firms' profit, but not for foreign firms', foreign firms will be discriminated against when competing for government procurement contracts. Foreign firms will be chosen less often and, when chosen, earn less profit than local firms. We analyze a more central authority's policies against such discrimination given a situation in which a government has private information on product quality, and the competing firms have private information on own costs. Necessary and sufficient conditions for free revelation of quality information are derived. Finally, optimal policy when these conditions are not satisfied is characterized and discussed.
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We study favoritism in public procurement of cleaning service contracts in Sweden 1990-1998. Cleaning services are a low-tech, clearly defined product with easy entry and no ex-ante quality differences. We study a period where the law allowed municipalities high degrees of freedom in choosing the winner. In our data, the lowest bid does not win 61% of the time, and municipalities pay on average 38% more than the lowest bid. Municipal behavior systematically correlates with the composition of the municipal council: councils with the largest majorities (whether right-or left-wing) put no weight on price in determining the winner. Our data and results demonstrate that favoritism may quickly occur even in a highly non-corrupt society once the rules allow for it, and whether or not it occurs is systematically linked to some political fraction having high control over decision-making.
Government procurement and international trade
Journal of international economics, 1989
We model the bidding for a government contract in which there is imperfect competition; each bidder is better informed about his own costs than either his rival bidders or the government; and the distribution of the domestic firms' costs differs from the distribution of foreign firms' costs because of comparative-advantage effects. We find that the gcyemment minimizes its expected procurement cost by operating a pii;;\;-prcf&eni;i: policy, not necessarily purchasing from the lowest bidder.
Politics and Procurement: Evidence from Cleaning Contracts
Social Science Research Network, 2007
We study the effects of politics on public procurement in Swedish municipalities in 1990-98 when they had high degrees of freedom in designing procurements, using data on cleaning services. We aim to explain why the lowest bidder does not win 58% of the time and conditional on the lowest bid not winning the municipalities pay 43% more than the lowest bid. We find that leftwing municipalities are more price-sensitive; in rightwing municipalities, the effect of price depends on the number of bidders; the municipalities take into account the multi-object aspect of the procurements; and that in leftwing municipalities, the bids are endogenous and related to favoritism.
International and Comparative Law Review, 2021
Summary As a response to possible distortive effects of foreign subsidies, which are not covered by the current rules of the World Trade Organization and primary and secondary law of the EU, on 6th May 2021 the European Commission introduced a new regime against foreign subsidies by introducing the proposal of the Regulation on foreign subsidies distorting the internal market. This new proposal includes three so-called modules: a set of measures of general application that governs the ex officio review of subsidies (Module 1), specific rules on concentrations (Module 2) and specific rules in public procurement in the EU (Module 3). The paper will focus on some of the features of Module 3 and assess the context, feasibility, and possible consequences for the course of public procurement in the EU covered by the public procurement directives