The Two Sides of Discretion: Assessing Efficiency and Quality in Government Purchases
65 Pages Posted: 30 Sep 2022 Last revised: 30 Apr 2024
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 have more discretion in awarding public contracts. Discretionary purchases are 16% costlier than regulated auctions. However, two-fifths of the price difference can be attributed to higher-quality products. Despite potential inefficiencies, discretion may improve public service provision by enabling the acquisition of premium products. I find that hospitals using discretion to purchase higher-quality medicines experience reduced mortality rates. These findings emphasize the need for regulations to balance efficiency and quality concerns when limiting discretion.
Keywords: public procurement, product quality, overpricing, auctions, bid waivers
JEL Classification: L15, H57, D73
Suggested Citation: Suggested Citation