Does Dual-Sourcing Lower Procurement Costs?

Abstract

I study the determinants of dual sourcing and its effects on government procurement costs using a panel dataset of tactical missiles. American defense policy encourages the use of dual sourcing to reduce government procurement costs. Recent theoretical work is skeptical of this policy, but has not been subjected to empirical testing. Consistent with theory, I find dual sourcing is used more often after incumbent suppliers demonstrate quality control problems, and in settings where tacit collusion is likely to be difficult. However, I find dual sourcing only reduces government procurement costs if there is a subsequent winner-take-all auction.

Keywords: Procurement, learning curve, second sourcing, defense

JEL Classification: H57, L14, L23, O38