Indirect Savings from Public Procurement Centralization

Abstract

An influential study by Bandiera, Prat and Valletti (2009) exploits the introduction of a central purchasing agency in Italy to identify the amount and sources of public waste. Among other findings, it estimates that purchasing through a central agency directly saves 28% on prices. We find that centralized prices also have significant indirect effects, leading to a 17.7% reduction among non-centralized ones. The indirect effects of centralization appear driven by informational externalities – rather than an improved outside option – on less competent public buyers purchasing more complex goods. Accounting for indirect savings also increases the estimate of direct ones.

Keywords: Centralization, Informational externalities, Procurement, Public Contracts

JEL Classification: D44, H11, H57, H83, L38, L88