Contract Shifting vs. Contract Splitting in Public Procurement

Abstract

This paper investigates the consequences of prohibiting discretion in public procurement. We study whether procurement officials manipulate the estimated value of contracts to avoid crossing regulatory thresholds and how this impacts procurement outcomes. We exploit the unique design of the procurement law in Colombia to document three empirical findings. First, there is substantial manipulation of contracts around the threshold. Second, manipulation occurs in two different forms: contract shifting and contract splitting. Contract shifting means decreasing the estimated value of the contract while contract splitting refers to dividing a contract into multiple smaller parts. We show that contract shifting is the main form of manipulation in this context. Third, manipulation decreases the final value paid and does not affect the number of bidders or the frequency of repeated winners. However, manipulation decreases the quality of the procedure. We propose a model of public procurement that explains when each type of manipulation is used and outlines its welfare implications. We find that procurers promote contract shifting when they face small purchase thresholds and contract splitting when they face large ones. Conversely, the model shows that contract splitting is welfare-enhancing for small thresholds and decreasing for large ones. Contract shifting is always welfare-enhancing. We conclude by discussing the policy implications.