On the Scale and Welfare Costs of Procurement
11 Pages Posted: 31 Jan 2014
Date Written: December 28, 2013
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: Suggested Citation