Winning by Default: Why is There So Little Competition in Government Procurement?

Government procurement contracts rarely have many bids, often only one. Motivated by the institutional features of federal procurement, this paper develops a principal-agent model where a buyer seeks sellers at a cost and negotiates contract terms with them. The model is identified and estimated with data on IT and telecommunications contracts. We find the benefits of drawing additional sellers are significantly reduced because the procurement agency can extract informational rents from sellers. Another factor explaining the small number of bids is that sellers are relatively homogeneous, conditional on observed project attributes. Administrative hurdles and corruption appear to play very limited roles.

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