Discretion and public procurement outcomes in Europe*

Abstract

Public procurement regulations aim to ensure the state minimizes contract award prices by specifying the processes to be used in issuing calls for tenders and award of contracts. Cost minimization goals may be complemented by ancillary objectives such as supporting small firms or disadvantaged groups. Recent theory suggests procurement regulations and practices constraining the ability to exercise discretion in awarding contracts may increase average procurement costs. Using detailed data on procurement awards in 33 European countries, we find that restrictions on exercise of discretion are associated with higher average contract prices, and that increases in prices are greater in countries with above average government effectiveness. We also show that realizing price-reducing benefits from exercising greater discretion, where permitted by law, reduces the probability small firms win contracts and continue to do so. Our findings point to a tradeoff between the potential to lower prices by exercising discretion and policies that aim to increase the likelihood SMEs are awarded contracts.