On the Scale and Welfare Costs of Procurement

11 Pages Posted: 31 Jan 2014

See all articles by Rob van der Noll

Rob van der Noll

Authority for Consumers & Markets (ACM)

Date Written: December 28, 2013

Abstract

This paper studies the design of procurement, where a buyer seeks to award a contract to a single supplier. The model incorporates the costs of bidding and the costs of evaluating proposals for the buyer. These information costs are a contribution to the literature and are weighted against the benefits of competition. Public procurement regulations entail that procurements should be organized on a large scale. The motivation is that larger markets promote competition, equity and reduce corruption. In contrast, this paper finds that large markets may be welfare decreasing. Firstly, the market size the procurer sets is too high when the bidder’s cost per proposal exceed the procurer’s cost per proposal. Secondly, the market size the procurer sets increases in the bidder’s cost.

Keywords: public procurement, procurement costs, market size

JEL Classification: D44, D82

Suggested Citation

van der Noll, Rob, On the Scale and Welfare Costs of Procurement (December 28, 2013). Available at SSRN: https://ssrn.com/abstract=2388154 or http://dx.doi.org/10.2139/ssrn.2388154

Rob Van der Noll (Contact Author)

Authority for Consumers & Markets (ACM) ( email )

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+31 70 7222581 (Phone)

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