Discretion and Corruption in Public Procurement
Abstract: This paper investigates the determinants and consequences of increasing a buyer's discretion in public procurement. I study the role of discretion in the context of a Hungarian policy reform which removed the obligation of using an open auction for contracts under a certain anticipated value. Below this threshold, buyers can use an alternative "high-discretion" procedure to purchase goods and services. At the threshold, I document large discontinuities in procurement outcomes, but I also find a discontinuity in the density of anticipated contract value, indicating that public agencies set contract values strategically to avoid auctions. I exploit the time variation of the policy reform to estimate the effects of increased discretion and find that discretion increases the price of contracts and decreases the productivity of contractors. I use a structural model to identify discretion's impact on rents from corruption and to simulate the effect of alternative value thresholds. I find that the actual threshold redistributes about 2 percent of the total contract value from taxpayers to firms and decreases the average productivity of contractors by approximately 1.6 percent. My simulations suggest that the optimal threshold would be about a third of the actual.
