The Two Sides of Discretion: Assessing Efficiency and Quality in Government Purchases
68 Pages Posted: 30 Sep 2022 Last revised: 20 Oct 2023
Date Written: September 8, 2022
Exploiting a rule in Brazil that exempts public purchases below a certain threshold value from competitive bidding, I provide evidence of an efficiency-quality trade-off when government agencies are given more flexibility in awarding public procurement contracts. Products acquired with higher discretion are 16% more expensive than those obtained via regulated auctions. However, about two-fifths of this price difference can be attributed to the procurement of higher-quality products. To address concerns of threshold manipulation, I show results remain robust even after removing observations near the threshold and after incorporating an instrumental variable analysis leveraging a regulatory increase in the threshold. Despite potential inefficiencies, greater discretion can enhance the quality of public services by facilitating purchases of premium products. For instance, I find a decrease in inpatient mortality rates in hospitals that use discretion to buy better medicines. These results suggest that regulations curbing discretion should carefully balance efficiency and quality considerations.
Keywords: public procurement, product quality, overpricing, auctions, bid waivers
JEL Classification: L15, H57, D73
Suggested Citation: Suggested Citation