Political corruption in the execution of public contracts

This paper presents a novel theory of corruption in public procurement. It considers an agency setting of contract execution where the principal is a politician who can commit to a contract auditing policy. It is found that a benevolent politician, by choosing a sufficiently strict auditing, deters the contracting firm from padding costs; conversely, a selfish politician chooses a relatively lax auditing in order to create an incentive for cost-padding, and engages in corruption with the firm in case of detection. If the cost of auditing is high enough, even a benevolent politician might prefer to allow cost-padding

An elimination contest with non-sunk bids

In this paper we study a multi-stage elimination contest with non-sunk bids: differently from existing literature, we realize that when players are budget-constrained, they do not regard past bids as strategically irrelevant in their decision of how much to bid in following stages. This happens because they face a basic trade-off when allocating scarce resources over stages. We believe that although non-sunk bids make the analysis more complex, they allow to improve the quality of the modelization for many real scenarios, like R&D contests and sport tournaments. In our simple two-stage framework with complete information and asymmetric players, we find that: (i) there is a unique SPNE where in the first stage only the strongest player bids positive, while forcing the others to bid zero; in the second stage shortlisted bidders play mixed strategies, and the strongest player wins the game on average; (ii) relative ex-ante strengths of players are relatively more important, in determining the outcome of the game, than their relative abilities of allocating limited resources over the stages; (iii) the two-stage contest yields a lower expected revenue than the one-stage one, due to the fact that the first stage yields basically no revenue and that shortlisting to the second stage is inefficient. On the basis of these results, our elimination contest does not seem to be a very advantageous allocation mechanism for the contest sponsor

An elimination contest with non-sunk bids

In this paper we study a multi-stage elimination contest with non-sunk bids: differently from existing literature, we realize that when players are budget-constrained, they do not regard past bids as strategically irrelevant in their decision of how much to bid in following stages. This happens because they face a basic trade-off when allocating scarce resources over stages. We believe that although non-sunk bids make the analysis more complex, they allow to improve the quality of the modelization for many real scenarios, like R&D contests and sport tournaments. In our simple two-stage framework with complete information and asymmetric players, we find that: (i) there is a unique SPNE where in the first stage only the strongest player bids positive, while forcing the others to bid zero; in the second stage shortlisted bidders play mixed strategies, and the strongest player wins the game on average; (ii) relative ex-ante strengths of players are relatively more important, in determining the outcome of the game, than their relative abilities of allocating limited resources over the stages; (iii) the two-stage contest yields a lower expected revenue than the one-stage one, due to the fact that the first stage yields basically no revenue and that shortlisting to the second stage is inefficient. On the basis of these results, our elimination contest does not seem to be a very advantageous allocation mechanism for the contest sponsor

Political corruption in the execution of public contracts

This paper presents a novel theory of corruption in public procurement. It considers an agency setting of contract execution where the principal is a politician who can commit to a contract auditing policy. It is found that a benevolent politician, by choosing a sufficiently strict auditing, deters the contracting firm from padding costs; conversely, a selfish politician chooses a relatively lax auditing in order to create an incentive for cost-padding, and engages in corruption with the firm in case of detection. If the cost of auditing is high enough, even a benevolent politician might prefer to allow cost-padding

The greener, the better? Evidence from government contractors

Governments can support the green transition through green public procurement. Despite its strategic importance, the impact of this policy on firms remains unclear. Using US data, this paper provides the first empirical analysis of the causal effects of green contracts on corporate environmental and economic performance. We focus on an affirmative program for sustainable products, which represents one-sixth of the total federal procurement budget, and publicly traded firms, which account for one-third of total US emissions. Our results show that securing green contracts reduces emissions relative to firm size and increases productivity, with these effects persisting in the long run. We find no evidence that the program selects greener firms, nor that green public procurement sales crowd out private sales. We propose that increased R&D investment, incentivized by the program’s requirements, is a key mechanism behind these improvements

Common Ownership Unpacked

In this paper we study the market effects of common ownership in a setting where any ownership structure and any shareholder size is allowed. We depart from the Standard reduced form approach of assuming that firms maximize a weighted average of shareholders' portfolios, and instead study the collective choice problem of shareholders head-on. In our model shareholder meetings elect firm managers by one-share one-vote majority rule. Managers differ in their degree of aversion to the negative externality of roduction. Voting for socially concerned managers therefore provides a mechanism for common owners to direct away the firm from own profit towards industry profit maximization. We show that allowing shareholders of any size to freely diversify their portfolio leads to monopolistic outcomes. Our results have the novel policy implication that the anticompetitive effects of common ownership can emerge even when blockholders are undiversified, but the majority of shares belongs to small diversified shareholders, indicating that small diversified portfolios may also be a threat

Public procurement as an innovation policy: Where do we stand?

Economics and innovation scholars have long recognized the potential of public procurement to trigger innovation. To what extent has this potential been realized so far? What can be done to improve the performance of PPI in this regard? This paper addresses these issues by providing a literature survey of research on public procurement of innovation (PPI). After categorizing PPI instruments, the paper discusses existing interdisciplinary knowledge to answer four broad questions: i) Does PPI spur innovation? ii) How should PPI be designed to best spur innovation? iii) What are the main barriers to implement PPI? iv) What is the role of PPI in the innovation policy mix? The paper concludes with a discussion of future research needs and policy insights in light of current global challenge

Political corruption in the execution of public contracts

This paper presents a novel theoretical framework to explain the occurrence of corruption in public procurement. It extends the agency cost-padding model by Laffont and Tirole (1992) to allow for the principal to be a partially selfish politician who can design the contract auditing policy. It is found that a benevolent politician, by choosing a sufficiently strict auditing, deters the contracting firm from padding costs; conversely, a selfish politician chooses a relatively lax auditing in order to create an incentive for cost-padding, and engages in corruption with the firm in case of detection. If the cost of auditing is high enough, even a benevolent politician might prefer to allow cost-padding

Interdisciplinary essays on public procurement

Accounting for about 15-20% of GDP in developed economies, public procurement is both a paramount economic phenomenon and a leading activity of governments. Sound procurement policies and practices are therefore essential not only to achieve best value for money when purchasing goods and services of public utility, but also to pursue strategic objectives of crucial importance (e.g., sustainable growth and innovation) and to optimize spending in an era where public money has a high opportunity cost. This dissertation contributes to the research on public procurement by providing original investigations and results in an interdisciplinary fashion. The three essays presented adopt different methodologies to analyze relevant issues in public procurement which have been so far neglected by the literature. The first essay provides an auction-theoretical analysis of “Precommercial Procurement” (PCP), which is an innovative stepwise practice recently introduced in the EU for the public procurement of R&D. In particular, PCP is modeled as a multistage elimination contest with budget-constrained players and non-sunk bids. The non-sunk feature constitutes a novelty in the modelization of elimination contests and relies on the consideration that when budget-constrained contestants initially strategize on how much to bid in each stage, they do not regard bids spent in earlier stages as strategically irrelevant. This is due to the fact that contestants face a trade-off when allocating scarce resources over stages: the more they spend earlier the less they have to spend later, and vice versa. In a simple two-stage all-pay framework with complete information and asymmetric players, it is found that, notwithstanding the trade-off, the ex-ante strongest player is always able to deter other players from submitting a positive bid in the first stage, guaranteeing herself shortlisting with the smallest outlay, and saving most resources for the second stage. This is shown to imply that the two-stage all-pay contest has a lower performance, in terms of expected revenue, than the single-stage one. On the basis of these results, PCP does not seem to be a very advantageous practice for the procurement of R&D. The second essay provides a contract-theoretical framework to explain the occurrence of embezzlement of public money in the execution of public contracts. It is argued that at the core of the phenomenon is an agency problem where the room for the contracting firm’s moral hazard is created by the opportunism of its principal - a corruptible top-tier politician. It is considered that often corruption interests the execution stage of a contract (rather than only the award stage) and has a political nature (rather than only bureaucratic): top-level politicians may as well have to gain from large-scale corruption. In particular, the model allows for the political principal to be partially selfish and for both the auditing technology and the stakes of corruption to be endogenous and dependent on the selfishness of the politician. The model shows that while a moderately opportunist politician prevents the firm from embezzling money, an enough opportunist politician creates an incentive for embezzlement in optimal contracts, in order to ask for a share of the money conditional upon detection. The third essay investigates empirically the relationship between the degree of centralization in a procurement system and its performance. Despite its centrality, this issue has been only marginally considered by the literature, and without conclusive findings. The essay exploits the TED dataset to provide a preliminary investigation of the issue for Italy. The Italian case is appropriate in this context since all levels of government plus a number of other public institutions are involved in procurement, and are largely subjected to the same rules. Using winning rebate as a measure of procurement performance, and controlling for other determinants of rebate, it is found that small decentralized units (i.e., municipalities and public enterprises) are less efficient than (more) central purchasers, despite they currently award most procurement contracts. It is argued that at the basis of this performance gap is the fact that small decentralized purchasing units lack the specialized and competent human resources which are needed to efficiently administrate the procurement process. It is therefore concluded that the Italian procurement system is probably too much decentralized and that some reorganization on a more centralized basis could improve on the general performance gap

Too good to be true? How time-inconsistent renewable energy policies can deter investments

The transition towards low-carbon economies requires massive investments into renewable energies, which are commonly supported through regulatory frameworks. Yet, governments can have incentives - and the ability - to deviate from previously-announced support once those investments have been made, which can deter investments. We analyze a renewable energy regulation game, apply a model of time-inconsistency to renewable energy policy and derive under what conditions governments have incentives to deviate from their commitments. We analyze the effects of various support policies and deployment targets and explain why Spain conducted retrospective changes in the period 2010-2013 whereas Germany stuck to its commitments