Rules Versus Discretion in Public Procurement

The paper presented in this ZEW Research Seminar deals with the trade-off between rules and discretion in the context of US federal procurement. Below an arbitrary threshold amount, contracts can be awarded using procedures that are subject to significantly fewer rules and less oversight. Leveraging a change in the threshold value, the author document three key empirical findings. First, there is substantial bunching of contracts at the threshold. Second, the added scrutiny introduced by rules distorts the award amount of some contracts, while discouraging other purchases altogether. Third, contracts subject to more scrutiny perform worse ex post. The paper presented in this ZEW Research Seminar proposes and estimates a stylized model of public procurement that is consistent with these findings. The author finds that, at current levels, the benefits from waste prevention are modest relative to the size of the compliance costs introduced by regulation. He finds that the optimal threshold is substantially higher than the current one, and that a proposed increase in the threshold will leave the government better off. The model highlights the key role of incentive misalignment in bureaucracies, and shows quantitatively how increased discretion can be optimal as misalignment is reduced.