Public Procurement Relationships in the Shadow of Trial: Evidence from Russia

Abstract

Contractibility and contract enforcement in economic transactions is important for efficiency. One way to support and complete contracts is via a viable legal system, which is difficult in developing countries with weak rule of law and state capacity. We study an alternative attempt to ensure contracts are complete and enforced - relying on ex-ante standardization of contracts by a third party - the government. We use the a unique natural experiment, a reform of standardization of procurement contracts in Russia, as well as the the universe of public procurement contracts (spanning 30% of Russian GDP), and associated court cases to evaluate whether the reform improved contract enforcement and market efficiency. Contracts were standardized in a staggered fashion, good-by-good and service-by-service in years 2017-2020, which allows causal identification of the effects of the reform on prices, quantities and disputes at the good level. Ex ante, the viability of the reform to improve market efficiency is unclear. On one hand, the standardization of contracts may reduce transaction costs and minimize the necessity of involving the courts in dispute resolutions, ultimately elevating transaction values. Conversely, standardization may limit the ability of trading parties to accommodate idiosyncratic needs, increase disputes by bringing down the costs associated with initiating legal proceedings, and curtail transaction values. Our preliminary findings support the former hypothesis