Discretion and Public Procurement Outcomes

Public procurement laws designed to reduce the scope for corruption and collusion when government entities purchase goods and services may come at a cost if the exercise of discretion by procuring authorities could reduce contract award prices. Theory suggests a tradeoff between restricting discretion and average procurement costs in countries with high government effectiveness. We use detailed data on procurement awards in 33 European countries to assess the relationship between law and observed practice regarding exercise of discretion and average procurement costs, as well as the probability small firms win contracts. Procurement law disciplines pertaining to discretion are not associated with average procurement costs, which contrasts with a positive, significant relationship between more restrictive practice towards exercise of discretion and contract prices, especially in countries with above average government effectiveness. The likelihood that small and medium enterprises will win contracts increases with more restrictions on the exercise of discretion.