Rethinking Discretion in Public Procurement

Abstract

Exploiting a rule in Brazil that waives competitive bidding for small-value purchases, I find evidence of an efficiency-quality trade-off when government agencies have more flexibility in awarding public procurement contracts. Products purchased with higher discretion are 16% more expensive than those purchased via regulated auctions. However, about two-fifths of this overpricing is explained by the purchase of higher-quality products. Additionally, discretion can improve the quality of public services, as demonstrated by lower inpatient mortality rates at hospitals that use discretion to purchase better essential medicines. These findings suggest that regulations on discretion should balance efficiency and quality considerations.

Keywords: product quality, efficiency, auctions, bid waivers

JEL Classification: L15, H57, D73