Interdisciplinary essays on public procurement
Creators: name: Chiappinelli, Olga
Publisher: name: IMT Alti Studi Lucca
Year: 2015
Subjects: HB Economic Theory

description: Accounting for about 15-20% of GDP in developed economies, public procurement is both a paramount economic phenomenon and a leading activity of governments. Sound procurement policies and practices are therefore essential not only to achieve best value for money when purchasing goods and services of public utility, but also to pursue strategic objectives of crucial importance (e.g., sustainable growth and innovation) and to optimize spending in an era where public money has a high opportunity cost. This dissertation contributes to the research on public procurement by providing original investigations and results in an interdisciplinary fashion. The three essays presented adopt different methodologies to analyze relevant issues in public procurement which have been so far neglected by the literature. The first essay provides an auction-theoretical analysis of “Precommercial Procurement” (PCP), which is an innovative stepwise practice recently introduced in the EU for the public procurement of R and D. In particular, PCP is modeled as a multistage elimination contest with budget-constrained players and non-sunk bids. The non-sunk feature constitutes a novelty in the modelization of elimination contests and relies on the consideration that when budget-constrained contestants initially strategize on how much to bid in each stage, they do not regard bids spent in earlier stages as strategically irrelevant. This is due to the fact that contestants face a trade-off when allocating scarce resources over stages: the more they spend earlier the less they have to spend later, and vice versa. In a simple two-stage all-pay framework with complete information and asymmetric players, it is found that, notwithstanding the trade-off, the ex-ante strongest player is always able to deter other players from submitting a positive bid in the first stage, guaranteeing herself shortlisting with the smallest outlay, and saving most resources for the second stage. This is shown to imply that the two-stage all-pay contest has a lower performance, in terms of expected revenue, than the single-stage one. On the basis of these results, PCP does not seem to be a very advantageous practice for the procurement of R and D. The second essay provides a contract-theoretical framework to explain the occurrence of embezzlement of public money in the execution of public contracts. It is argued that at the core of the phenomenon is an agency problem where the room for the contracting firm’s moral hazard is created by the opportunism of its principal - a corruptible top-tier politician. It is considered that often corruption interests the execution stage of a contract (rather than only the award stage) and has a political nature (rather than only bureaucratic): top-level politicians may as well have to gain from large-scale corruption. In particular, the model allows for the political principal to be partially selfish and for both the auditing technology and the stakes of corruption to be endogenous and dependent on the selfishness of the politician. The model shows that while a moderately opportunist politician prevents the firm from embezzling money, an enough opportunist politician creates an incentive for embezzlement in optimal contracts, in order to ask for a share of the money conditional upon detection. The third essay investigates empirically the relationship between the degree of centralization in a procurement system and its performance. Despite its centrality, this issue has been only marginally considered by the literature, and without conclusive findings. The essay exploits the TED dataset to provide a preliminary investigation of the issue for Italy. The Italian case is appropriate in this context since all levels of government plus a number of other public institutions are involved in procurement, and are largely subjected to the same rules. Using winning rebate as a measure of procurement performance, and controlling for other determinants of rebate, it is found that small decentralized units (i.e., municipalities and public enterprises) are less efficient than (more) central purchasers, despite they currently award most procurement contracts. It is argued that at the basis of this performance gap is the fact that small decentralized purchasing units lack the specialized and competent human resources which are needed to efficiently administrate the procurement process. It is therefore concluded that the Italian procurement system is probably too much decentralized and that some reorganization on a more centralized basis could improve on the general performance gap.