Third-party Opportunism and the (in)efficiency of Public Contracts

Marian Moszoro (IESE Business School)
Pablo T. Spiller (University of California, Berkeley)

Abstract: The lack of flexibility in public procurement design and implementation is a political risk adaptation by which public agents limit hazards from opportunistic third parties --- political opponents, competitors, interest groups --- and externalize the associated adaptation costs to the public at large. Public agents endogenize the likelihood of opportunistic challenge lowering third parties’ expected gains and increasing litigation costs. We provide a comprehensible theoretical framework with empirically testable predictions: scrutiny increases public contracting efficiency in costly litigation environments, concentrated (politically) contestable markets, and with upwardly biased beliefs about benefits of challenge.


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