Competition and Contract Performance: Evidence from Us Defense Procurement

Abstract: We study the effects of intensifying competition for contracts through advertising. Publicizing contract opportunities promotes bidder participation, potentially leading to cost efficiency gains. Yet extensive advertising could exacerbate adverse selection of bidders on non-contractible quality dimensions. We study this trade-off in the context of procurement contracts for the U.S. Department of Defense. Our empirical strategy leverages a regulation that mandates agencies to publicize contract opportunities that exceed a certain threshold. We find that advertised contracts increase competition and reduce prices. However, we find that the post-award performance of publicized contracts worsens, resulting in more cost overruns and delays. The latter effect is driven by goods and services that are relatively more complex, highlighting the role of contract incompleteness. We complement our results with a model in which the buyer endogenously decides the extent of competition. This model allows us to recover public buyers' preference parameters over price, quality, and idiosyncratic favoritism, and further study the extent to which the trade-off between competition and adverse selection can be delegated to the agent.