Discretion and Favoritism in Public Procurement

Ferenc Szucs

Journal of the European Economic Association, 2024, vol. 22, issue 1, 117-160

Abstract: This paper investigates the consequences of bureaucratic discretion in public procurement. I exploit a Hungarian policy reform, which allows a “high-discretion” procedure below a certain contract value. At the threshold, I document large discontinuities both in procurement outcomes and in the density of contract values, which indicates that buyers manipulate contract values to avoid auctions. I combine the reform and a structural model to find that discretion increases prices and results in the selection of less productive contractors. I also show that high discretion benefits firms with connections to the party of the central government. I use the structural model to document that public buyers are willing to sacrifice more contract value to increase their discretion if more connected firms are operating in the market. I also use the model to simulate the effects of counterfactual procurement thresholds on different procurement outcomes.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:22:y:2024:i:1:p:117-160.

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