Winning by Default: Why is There So Little Competition in Government Procurement?

Abstract

In government procurement auctions, eligibility requirements are often imposed and, perhaps not surprisingly, contracts generally have a small number of participating bidders. To understand the effects of the restrictions of competition on the total cost of government procurement, we develop, identify, and estimate a principal-agent model in which the government selects a contractor to undertake a project. We consider three reasons why restricting entry could be beneficial to the government: by decreasing bid processing and solicitation costs, by increasing the chance of selecting a favored contractor and consequently reaping benefits from the favored contractor, and by decreasing the expected amount of price to the winning contractor. When the participation is costly and bidders are heterogeneous, the expected amount of price to the winning contractor may decrease by excluding ex-ante less efficient contractors. Using our estimates, we quantify the effects of the eligibility restrictions on the total cost of procurement.