Centralized Public Procurement and Favoritism

Organizing public procurement (PP) efficiently is in the primary interest of the public economy. The paper presented in  this ZEW Research Serminar focuses on one particular procurement implementation, centralized public procurement (CPP), which is argued to be a tool to increase efficiency in PP. It notes that there is yet another mechanism to increase efficiency through CPP: preventing favoritism. Favoritism can emerge through the procurer revealing rival prices to the favored bidders; hence their incentives are distorted towards bidding just below their rivals, leading to an illusion of tight competition yet potentially non-competitive outcomes. In particular, the paper employs a Regression Discontinuity based approach to detect favoritism, and provide evidence for PP of Finnish cleaning services. The author finds evidence of favoritism in locally procured cleaning services but not when using CPP. The indicative evidence suggests that CPP could work to mitigate the potential issue of favoritism; however, all possible selection biases cannot be ruled out.