“Supplier Selection and Contract Enforcement: Evidence from Performance Bonding“

(previously circulated under the title “Can the Private Sector Ensure the Public Interest? Evidence from Federal Procurement”)

with G. Rovigatti

Journal of Economics & Management Strategy (2022)

We analyze an important but little-studied institution for balancing supply risk in the management of procurement operations: performance bonding. By adding the surety as a third party that guarantees contract fulfillment between supplier and buyer, performance bonding aims to streamline the purchasing process by influencing both contractor selection in the bidding phase and contract enforcement during project execution. Using the data on US government procurement from 2005 to 2015 and exploiting an exogenous variation in the threshold for its application to construction contracts, we find that performance bonding improves contract outcomes by 9 and 4.2 percent in terms of delays and extra costs, respectively. Net of bond premia, which by law are included in the award amounts, this effect translates into a savings of about 4 percent in the budget for federal construction projects and 16 percent for mid-size projects. We provide suggestive evidence on the effectiveness of selection and monitoring by sureties as driving channels.

“Bureaucratic Competence and Procurement Outcomes” 

with F. Decarolis, E. Iossa, V. Mollisi, G. Spagnolo

The Journal of Law, Economics, and Organization (2020) 

To what extent does a more competent public bureaucracy contribute to better economic outcomes? We address this question in the context of the US federal procurement of services and works, by combining contract-level data on procurement performance and bureau-level data on competence and workforce characteristics. We use the death occurrences of specific types of employees as instruments and find that an increase in bureau competence causes a significant and economically important reduction in: i) time delays, ii) cost overruns, and iii) number of renegotiations. Cooperation within the office appears to be a key driver of the findings.

We investigate the impact of public procurement spending on business survival. Using Italy as a laboratory, we construct a large-scale dataset on firms—covering balance-sheet, income-statement, and administrative records—and match it with public contract data. Employing a regression discontinuity design for close-call procurement auctions, we find that winners are more likely to stay in the market than marginal losers after the award and that the survival boost lasts longer than the contract duration. We document that this effect is associated with earnings substitution rather than increased business scale. Regardless of size, contracts that are long-lasting and awarded by decentralized buyers are more impactful for survival prospects. Survivors experience no productivity premium, but rather an improvement in their credit position.

Keywords: firm dynamics, government demand, public procurement, productivity, auctions, regression discontinuity design. JEL Classification: D44, H32, H57.

While effective bureaucracy is crucial for state capacity, its decision-making remains a black box. We elicit preferences of 900+ real-world public procurement officials in Finland and Germany. This is an important pursuit as they report having sizeable discretion and minimal extrinsic incentives. Through conjoint experiments, we identify the relative importance of multiple features of procurement outcomes. Officials prioritize avoiding unexpectedly high prices but not seeking low prices. Avoiding winners with prior bad performance is the most important feature. Officials avoid very low competition, while litigation risks and regional favoritism play minor roles. Personal preferences and office interests appear well aligned among bureaucrats.

 Keywords: Bureaucrats, Public Procurement, Preferences, Intrinsic Motivation, Conjoint Experiment. JEL Classification: D73, D90; H11, H57, H83; K41; M54.

“Bureaucratic Frictions and Innovation Procurement”

(previously circulated under the title “Buyers’ Workload and R&D Procurement Outcomes: Evidence from the US Air Force Research Lab”)

with E. Raiteri

Submitted 

Is excessive workload a friction to public agencies? Examining R&D procurements by the US government, we link contract, patent, and office records to the officer responsible to estimate how workload affects contract execution. Unanticipated retirement shifts among officers are used to instrument workload. When an officer’s workload declines, we find a large increase in patenting—keeping procurement budget and the number of purchases fixed, an additional officer leads to a 2.5 percentage point increase in the probability that a contract generates patents, representing 28% of the sample variation. We provide suggestive evidence that overworked officers cannot devote sufficient time to key contract specifications, resulting in poorer guidance to R&D suppliers.

 Keywords: Workload, Public Procurement, Contracting Officer, R&D, Patents. JEL Classification: D23; H57; O31, O32.

A set-aside restricts participation in procurement contests to targeted firms. Despite being widely used, its effects on actual competition and contract outcomes are a priori ambiguous. We pool a decade of US federal procurement data to shed light on this empirical question using a two-stage approach. To circumvent the lack of exogenous variation in our data, as a first step we draw on random forest techniques to calculate the likelihood of a tender being set aside. We then estimate the effect of restricted tenders on pre- and post-award outcomes using an inverse probability weighting regression adjustment. We find that set-asides prompt more firms to bid—that is, the increase in targeted bidders more than offsets the loss of untargeted. During the execution phase, set-aside contracts incur higher cost overruns and delays. The more restrictive the set-aside, the stronger these effects. In a subset of our data, we leverage an unexpected spike in setaside spending to study implications for firm dynamics. We do not find evidence of increasing recipients’ performance over time.

Keywords: small businesses, set-aside, competition, procurement, public contracts, random forest, firm dynamics. JEL Classification: D22; H32, H57; L25.

Economics and innovation scholars have long recognized the potential of public procurement to trigger innovation. To what extent has this potential been realized so far? What can be done to improve the performance of public procurement of innovation (PPI) in this regard? This paper addresses these issues by providing a literature survey of research on PPI. After categorizing PPI instruments, the paper discusses existing interdisciplinary knowledge to answer four broad questions: i) Does PPI spur innovation? ii) How should PPI be designed to best spur innovation? iii) What are the main barriers to implement PPI? iv) What is the role of PPI in the innovation policy mix? The paper concludes with a discussion of future research needs and policy insights in light of current global challenges.

Keywords: innovation; public procurement; public policy; R&D; green purchases. JEL Classification: H23, H57, O30, O31, O32, O35, O36, O38.

A key issue in strategic management in the public sector is how government creates economic and social value through procurement. Unfortunately, most procurement studies are based on contract theories, which fail to incorporate the growing role of strategic management in performance. We fill this gap by analyzing longitudinal data on contracting to assess the equity and efficiency effects of a form of affirmative action used by governments: set-aside programs. Employing a machine learning-augmented propensity score weighting approach, we find that set-aside contracts are negatively associated with contract performance. These effects are attenuated by an agency’s dynamic capabilities and the extent to which the agency uses more competitive procedures. Our findings illustrate how the dynamic capabilities of a federal agency can simultaneously enhance equity and efficiency.

Keywords: Dynamic capabilities, resource-based view, public procurement, machine learning, random forest

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