Do Expiring Budgets Lead to Wasteful Year-End Spending? Evidence from Federal Procurement

67 Pages Posted: 28 Sep 2013  

Jeffrey B. Liebman

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Neale Mahoney

University of Chicago Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2013

Abstract

Many organizations have budgets that expire at the end of the fiscal year. Faced with uncertainty over future spending demands, these organizations have an incentive to build up a rainy day fund over the first part of the year. If demand does not materialize, they must rush to spend these resources on low quality projects at the end of the year. We test these predictions using data on procurement spending by the U.S. federal government. Using contract-level data on a near-universe of federal contracts, we document that spending in the last week of the year is 4.9 times higher than the rest-of-the-year weekly average. Using a newly available dataset that tracks the quality of $130 billion in information technology (I.T.) projects, we show that quality scores for year-end projects are 2.2 to 5.6 times more likely to be below the central value. Allowing agencies to roll over unused funding into the subsequent year can improve efficiency. We calibrate a dynamic model of spending and show that allowing rollover leads to welfare gains of up to 13 percent, and that intermediate policies can achieve a large portion of these gains. We document that the one federal agency that has the ability to roll over unused funding for I.T. projects does not exhibit a year-end spike in spending or drop-off in quality in this category of spending.

Suggested Citation

Liebman, Jeffrey B. and Mahoney, Neale, Do Expiring Budgets Lead to Wasteful Year-End Spending? Evidence from Federal Procurement (September 2013). NBER Working Paper No. w19481. Available at SSRN: https://ssrn.com/abstract=2332553

Jeffrey B. Liebman (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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National Bureau of Economic Research (NBER)

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Neale Mahoney

University of Chicago Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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