Stability of Procurement Networks

32 Pages Posted: 19 Mar 2024

See all articles by Khai Chiong

Khai Chiong

University of Texas at Dallas - Naveen Jindal School of Management

Anyan Qi

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: March 7, 2024

Abstract

Problem definition: Given an observed procurement network, we characterize when the network structure is rationalizable as pairwise stable – that there exist preferences such that no pairs of buyers and suppliers would deviate from the existing network structure. Based on our theoretical derivation, we introduce and empirically test a novel network property called the network instability score that measures the extent to which procurement relationships are pairwise stable.

Methodology/results: Our measure is theoretically founded in revealed preference theory. We show that the Weak Axiom of Revealed Pairwise Stability (WARPS) is a necessary and sufficient testable condition for pairwise stability. WARPS is a condition that checks whether a link can be added to the network to create pairs of isomorphic nodes, and we show this to be theoretically equivalent to checking for cycles in revealed preference relations. Empirically, we calculate our network instability score for public procurement networks of the European Union and find that our score possesses good empirical properties. Larger values of network instability predict bigger changes in the network structures. In addition, the degree of public sector transparency and corruption moderates the effect of instability.

Managerial implications: By calculating our proposed network instability score, which requires only a single snapshot of a network as data, agents such as firms and government agencies can quantify and manage their exposure to endogenous risks – risks due to the endogenous changes in the network structure of procurement relationships. In terms of implications for public procurement, our result suggests that higher network instability scores better predict changes in the network structures when there is less public sector corruption.

Keywords: Procurement networks, Pairwise stability, Revealed preference, Public procurement

Suggested Citation

Chiong, Khai and Qi, Anyan, Stability of Procurement Networks (March 7, 2024). Available at SSRN: https://ssrn.com/abstract=4752112 or http://dx.doi.org/10.2139/ssrn.4752112

Khai Chiong (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Anyan Qi

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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