The Auction Versus Negotiation Trade off in Public Procurement Under Political Scrutiny
Abstract: Should public authorities use competitive bidding or negotiation to select a contractor for public procurement contracts? While competitive bidding has traditionally been seen as the most effective procedure to achieve value for money and to avoid favouritism and corruption in public procurement while ensuring a transparent and competitive process (Bulow and Klemperer, 1996 etc.), recent developments in the economic literature tend to mitigate this common wisdom and suggest that the advantages of competitive bidding are not as clear cut (Bajari, MacMillan and Tadelis, 2010; Guasch, 2008; Estache et al., 2009 etc.). More specifically, these works show that it is more efficient to select providers of complex goods or services through negotiated procedures. In this paper; we investigate the motivations of public authorities to award public works procurement contracts using either auction or negotiation. In addition to the economic efficiency argument presented previously, we take Spiller (2008) seriously and consider that transactions between public and private agents can be driven by considerations beyond the economic efficiency. In particular, public authorities may be biased towards the use of auctions in public procurement since they are politically elected and subject to public scrutiny. Our empirical study relies on an exhaustive database of 2,671 public work procurement contracts in 2007 undertaken by 897 French municipalities, to which we have added information on municipal elections. Our empirical results show that electoral pressure does play a role in a municipality’s decision to award public procurement contracts through auctions or negotiations. More specifically, a more concentrated political market and a higher level of votes obtained by the opposition party increases the probability that a municipality relies on auction to award a public work procurement contract. Our empirical study therefore provides some support to Spiller (2008).