The Two Sides of Discretion: Assessing Efficiency and Quality in Government Purchases

Abstract

Using a rule in Brazil exempting small-value public purchases from competitive bidding, this paper reveals an efficiency-quality trade-off in public procurement. Discretionary purchases are 17% costlier than auctions, but two-fifths of this premium reflects more expensive and higher-quality brands, such as medicines with fewer batch suspensions and consumer goods with better quality scores. While discretion introduces inefficiencies, it improves public service delivery by enabling the acquisition of more reliable products. For instance, hospitals using discretion to purchase higher-quality medicines achieve lower mortality rates. These findings emphasize the need for regulations that balance efficiency and quality concerns when limiting discretion.

Keywords: public procurement, product quality, overpricing, auctions, bid waivers

JEL Classification: L15, H57, D73