The Bright Side of Discretion in Public Procurement

Abstract

This paper investigates the consequences of giving government agencies freedom of contract in public procurement. Exploiting a rule in Brazil that waives competitive bidding for small-value purchases, I find that agencies strategically design procurements so they can choose their suppliers directly. Products purchased under discretion are 22 percent more expensive than under auctions. However, half of this overpricing is explained by discretion allowing agencies to purchase higher-quality products. Finally, I document that discretion may improve the quality of public services provision. Public hospitals that purchase more essential medicines under discretion experience decreased in-patient mortality.