Procurement with Manipulation

Abstract: The aim of this paper is to document whether and how buyers use discretion in public procurement. To do so we use detailed data on Italian procurement. Our evidence is that manipulation of procurement terms to avoid legal requirements of free competition mostly happens in central authorities (Ministries or national road authority), who are frequent buyers and run procurement with discretion more frequently. We implement a bunching estimator and we find that the manipulation of the terms of the contracts is associated to more discretion, less competition but with no extra procurement costs measured by rebates and ex-post renegotiations. This evidence is compatible with the idea that (large and repeated) buyers might rely on discretion to keep contractors accountable. Manipulation of the terms of the contract, in contrast, is less likely in local municipalities. Using detailed data on municipal procurement we find that municipalities are less frequent buyers and manipulate procurement less frequently running systematically more competitive procurement, which comes at no extra procurement costs. To establish causality, we run a regression discontinuity analysis and find that females mayors quasi-experimentally elected in closely contested electoral races do not manipulate procurement, use less discretion at no extra procurement costs. Our overall evidence suggests that while discretion in procurement reduces competition it can be beneficial in contexts with repeated interactions between buyers and sellers.