“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

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 on business survival. Using Italy as a laboratory, we construct a large-scale dataset of firms—covering balance-sheet, income-statement, and administrative records—and match it with public contract data. Employing a regression discontinuity design for close-call auctions, we find that winners are more likely to stay in the market than marginal losers after the award and that the boost in survival chances lasts longer than the contract duration. We document that this effect is associated with earnings substitution rather than increased business scale and that survivors experience no productivity premium. However, we find that auction winners enjoy sizeable expansions in credit granted and, through their improved creditworthiness, are less likely to be forced out of the market.

Keywords: Firm survival, firm dynamics, public demand, public procurement, demand shocks, productivity, credit, 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 over 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 matter less. Personal preferences and office interests appear well-aligned among bureaucrats.

Keywords: Bureaucrats; Public Sector Management; Public Procurement; Conjoint Experiments; Managerial Objectives; Preferences. 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

R&R, Journal of Law, Economics and Organization

Is work overload a friction to public agencies? Using data on R&D procurement, patents, contracting units, and individual officers from a US federal agency, we investigate how contracting officer workload impacts innovation procurement outcomes. Unanticipated retirement shifts in a contracting unit, which result in unexpected changes in the number of colleagues, provide an exogenous source of variation that we exploit as an instrument for workload. When workload declines, we find a large increase in patent rates. Holding the procurement budget and number of purchases fixed, one additional officer leads to a 2.5 percentage point increase in the probability that a contract will generate a patent, representing 28% of sample variation. We provide suggestive evidence that overloaded officers may not allocate adequate time to crucial contract specifications, resulting in poorer guidance to R&D suppliers when it is most needed.

Keywords: Workload, procurement, bureaucracy, R&D, patents, instrumental variable. JEL Classification: D23, D73, H57, J24, O31

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.

Scholars and policymakers have long recognized the potential of public procurement to incentivize innovation. Yet it is unclear to what extent this potential has been realized and what measures should be implemented to maximize performance. This paper surveys the economic literature on public procurement of innovation (PPI) to take stock of this debate. We discuss the existing research on four broad questions: i) Does PPI spur innovation? ii) How should PPI be designed to best spur innovation? iii) What are the barriers to implementing PPI? iv) What is the role of PPI in the innovation policy mix? We conclude that none of these questions can yet be answered unambiguously. We highlight the areas where additional research is most needed and discuss policy implications for current global challenges.

Keywords: Innovation, R&D, public procurement, literature survey. 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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