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Centralized vs. Decentralized Procurement: Does Dispersed Information Call for Decentralized Decision-Making

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  • Vagstad, S.

Abstract

Should the government procure equipment for its agencies or let them run their own procurement auctions? Suppose the agency has private information about product quality, but is inclined to favor local suppliers. Decentralization saves bureaucracy and "agency costs" (costs tied to truthful revelation of quality information), but leads to biased decisions (a discriminatory auction). I show that the costs accociated with discrimination may increase when the quality differences increase.

Suggested Citation

  • Vagstad, S., 1997. "Centralized vs. Decentralized Procurement: Does Dispersed Information Call for Decentralized Decision-Making," Norway; Department of Economics, University of Bergen 1497, Department of Economics, University of Bergen.
  • Handle: RePEc:fth:bereco:1497
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    References listed on IDEAS

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    1. McAfee, R. Preston & McMillan, John, 1989. "Government procurement and international trade," Journal of International Economics, Elsevier, vol. 26(3-4), pages 291-308, May.
    2. Melumad, Nahum D. & Reichelstein, Stefan, 1989. "Value of communication in agencies," Journal of Economic Theory, Elsevier, vol. 47(2), pages 334-368, April.
    3. Bolton, Patrick & Farrell, Joseph, 1990. "Decentralization, Duplication, and Delay," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 803-826, August.
    4. repec:bla:joares:v:25:y:1987:i::p:1-21 is not listed on IDEAS
    5. Cabral, Luis M B & Greenstein, Shane, 1990. "Switching Costs and Bidding Parity in Government Procurement of Computer Systems," Journal of Law, Economics, and Organization, Oxford University Press, vol. 6(2), pages 453-469, Fall.
    6. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Auction design and favoritism," International Journal of Industrial Organization, Elsevier, vol. 9(1), pages 9-42, March.
    7. Barbara J. Spencer & James A. Brander, 1982. "Tariff Protection and Imperfect Competition," Working Papers 517, Queen's University, Department of Economics.
    8. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
    9. Greenstein, Shane, 1993. "Procedural Rules and Procurement Regulations: Complexity Creates Trade-offs," Journal of Law, Economics, and Organization, Oxford University Press, vol. 9(1), pages 159-180, April.
    10. Laffont, Jean-Jacques, 1990. "Analysis of Hidden Gaming in a Three-Level Hierarchy," Journal of Law, Economics, and Organization, Oxford University Press, vol. 6(2), pages 301-324, Fall.
    11. Vagstad, Steinar, 1995. "Promoting fair competition in public procurement," Journal of Public Economics, Elsevier, vol. 58(2), pages 283-307, October.
    12. Nahum D. Melumad & Toshiyuki Shibano, 1991. "Communication in Settings with No. Transfers," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 173-198, Summer.
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    Cited by:

    1. Munson, C.L. & Hu, J., 2010. "Incorporating quantity discounts and their inventory impacts into the centralized purchasing decision," European Journal of Operational Research, Elsevier, vol. 201(2), pages 581-592, March.
    2. Ganuza, Juan-Jose & Hauk, Esther, 2004. "Economic integration and corruption," International Journal of Industrial Organization, Elsevier, vol. 22(10), pages 1463-1484, December.
    3. Olga Chiappinelli, 2017. "Decentralization and Public Procurement Performance: New Evidence from Italy," Discussion Papers of DIW Berlin 1704, DIW Berlin, German Institute for Economic Research.
    4. Becerra, Ligia Melo, 2004. "Intergovernmental fiscal relations : the Colombian case," Economics PhD Theses 0304, Department of Economics, University of Sussex.
    5. Simona Baldi & Davide Vannoni, 2014. "The Impact of Centralization, Corruption and Institutional Quality on Procurement Prices: An Application to Pharmaceutical Purchasing in Italy," Carlo Alberto Notebooks 379, Collegio Carlo Alberto.

    More about this item

    Keywords

    INCENTIVES ; CONTRACTS ; AUCTIONS ; DISCRIMINATION;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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