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

68 Pages Posted: 30 Sep 2022 Last revised: 20 Oct 2023

See all articles by Dimas Fazio

Dimas Fazio

National University of Singapore (NUS) - Department of Finance

Date Written: September 8, 2022

Abstract

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

Fazio, Dimas, The Two Sides of Discretion: Assessing Efficiency and Quality in Government Purchases (September 8, 2022). Available at SSRN: https://ssrn.com/abstract=4212969 or http://dx.doi.org/10.2139/ssrn.4212969

Dimas Fazio (Contact Author)

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

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