High Earnings through Firm Influence: The Role of Hierarchical Structures in Public Procurement

Abstract

Public procurement, a critical but often overlooked aspect of governance, plays a pivotal role in steering the acquisition of goods, services and the commissioning of public works. Our study, analyzing over one million public procurement contracts from the Portuguese public administration, applies network science to unravel the complexities of this market. We uncover a market characterized by highly modular and hierarchical networks, with notable service specialization, regional diversity, and entity diversification. Our findings reveal a clear pattern: firms occupying influential positions within the networks consistently achieve higher earnings per bid. This disparity in earnings indicates a market where competi- tion is constrained and entry barriers for new firms are high. The implications of these findings are significant for policy reform. With entrenched hierarchies, the current procurement system demands a re-evaluation to promote a more equi- table, competitive, and dynamic market. Reforms are essential to leverage public spending effectively, fostering innovation and economic growth. Addressing pub- lic procurement’s structural limitations offers a tangible opportunity to create a more open, efficient marketplace, thereby boosting the societal and economic impact of public services.

Keywords: Public Procurement, Tenders, Market Organization, Network Analysis, Competition, Complexity