Regulatory Thresholds and Procurement Costs : evidence from Induced Distortions

Governments allocate substantial resources through public procurement, yet the design of procurement regulations involves a trade-off between transparency and the costs they impose on contracting authorities. Understanding how these rules affect purchasing behavior and procurement costs is essential for effective policy design. In this paper, we study how procurement thresholds shape purchasing decisions and their cost implications for contracting authorities in a middle-income country. Using a comprehensive administrative dataset covering all public procurement in Uruguay between 2002 and 2021, we exploit a regulatory threshold that determines the procurement procedure. This threshold creates discontinuities in procurement requirements, as more transparent procedures involve higher administrative burdens. We show that procurement thresholds induce significant behavioral distortions, with approximately 7.5\% of purchases clustering just below the cutoff. These responses are immediate and asymmetric to regulatory changes: relaxing thresholds reduces distortions, while tightening them increases their prevalence. Distortions are more pronounced at the end of the fiscal year, among more regulated buyers, and in environments with lower auditing intensity. Repeated relationships with suppliers also increase their likelihood. Importantly, these distortions have measurable cost implications. Affected purchases are associated with higher prices and a greater probability of overpricing. Finally, we estimate that the implicit cost of using a more stringent procedure is equivalent to approximately 1.5 times the procurement award at the threshold. These findings provides evidence on balancing transparency and cost.