PROCUREMENT & PUBLIC SERVICES

Public Procurement as a Demand-side Policy: Project Competition and Innovation Incentive

Francesco Decarolis, Gaetan de Rassenfosse, Leonardo M. Giuffrida, Elisabetta Iossa, Vincenzo Mollisi, Emilio Raiteri, Giancarlo Spagnolo

What is the impact of buyers on the performance of innovation procurement? In which phase of the procurement process are buyers most crucial and why? We address these questions by exploiting a novel dataset that links U.S. federal R&D contracts to their follow-on patents, citations and claims. Using the deaths of managers in the

o.ces close to where contracts are performed as shocks to the functioning of these fo.ces, we measure a positive and sizable eff.ect of public buyers on all three outcome measures. The buyer's role is stronger in the pre-award, tender-design phase, where cooperation between di.erent specialists is essential, than in the following contractmanagement phase typically performed by individual o.cers. Consistently, bureaus where employees perceive high level of cooperation within the o.ce are associated with better R&D outcomes.

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Buyers' Role in Innovation Procurement

Francesco Decarolis, Ga.etan de Rassenfosse, Leonardo M. Giu.rida, Elisabetta Iossa, Vincenzo Mollisi, Emilio Raiteri, Giancarlo Spagnolo

What is the impact of buyers on the performance of innovation procurement? In which phase of the procurement process are buyers most crucial and why? We address these questions by exploiting a novel dataset that links U.S. federal R&D contracts to their follow-on patents, citations and claims. Using the deaths of managers in the

o.ces close to where contracts are performed as shocks to the functioning of these fo.ces, we measure a positive and sizable eff.ect of public buyers on all three outcome measures. The buyer's role is stronger in the pre-award, tender-design phase, where cooperation between di.erent specialists is essential, than in the following contractmanagement phase typically performed by individual o.cers. Consistently, bureaus where employees perceive high level of cooperation within the o.ce are associated with better R&D outcomes.

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Organizing Competition for the Market

BY Elisabetta Iossa, Patrick Rey and Michael Waterson

The paper studies competition for the market in a setting where incumbents (and, to a lesser extent, neighboring incumbents) benefit from a cost advantage. The paper rst compares the outcome of staggered and synchronous tenders, before drawing the implications for market design. We find that the timing of tenders should depend on the likelihood of monopolization. When monopolization is expected, synchronous tendering is preferable, as it strengthens the pressure that entrants exercise on the monopolist. When instead other rms remain active, staggered tendering is preferable, as it maximizes the competitive pressure that comes from the other firms.

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Barriers towards foreign firms in international public procurement markets: a review

BY Chiara Carboni, Elisabetta Iossa and Gianpiero Mattera

The international dimension of public procurement has gained in importance in the last decade and has attracted the attention of economist and policy makers. A number of trade agreements were signed with the intention to remove barriers to procurement markets and favour entry of foreign firms and products. However, empirical evidence shows that, despite the existence of trade agreements, discrimination towards foreign firms still applies in a number of countries around the world. In this paper, we present the methodologies used in the economic literature for the identification of overt and covert barriers to public tenders and discuss the importance of collecting high quality data for meliorating the ability of international traders to detect procurement barriers.

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Public Private Partnerships In Europe For Building And Managing Public Infrastructures: An Economic Perspective

With Stephane Saussier

Abstract: Public–private partnerships (PPPs) are long-term contractual agreements between the public and private sector for the provision of public infrastructures and services. Due to tighter budget constraints and to a renewed interest in greater involvement of the private sector in the provision of public services, PPPs are likely to grow in the near future. In this paper, we review the theory and practice of PPPs, highlighting their potential role as well as discussing the main factors influencing the likelihood of performance failure.

With Stephane Saussier

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Bureaucratic Competence and Procurement Outcomes

posted 16 Jan 2018, 09:21 by Elisabetta Allegra

Francesco Decarolis, Leonardo M. Giuffrida, Elisabetta Iossa, Vincenzo Mollisi, Giancarlo Spagnolo

To what extent does a more competent public workforce contribute to better economic outcomes? We analyze this question in the context of the US federal procurement by combining data on office-level competencies, federal workforce characteristics, and procurement performance. Using an instrumental variable strategy, we find that the effects of competence heterogeneity across bureaus are quantitatively important: if all federal bureaus were to obtain NASA's high level of competence (corresponding to the top 10 percent of competence), delays in contract execution would decline by 7.2 million days and price renegotiations would drop by $13.5 billion over the 2010-2015 period analyzed. Cooperation within the office appears to be a key driver of the findings.

NBER WORKING PAPER 24201

Maintaining Competition in Recurrent Procurement Contracts: A case Study on the London Bus Market

By Elisabetta Iossa and Mike Waterson

Under recurrent procurement, the awarding of a contract to a firm may put it in an advantageous position in future tenders, which may reduce competition over time. The objective of this paper is to study the dynamics of competition for tendered contracts, focusing on factors that may generate incumbent advantage. Particular attention is given to learning economies, sunk costs of entry and switching costs for the procurer. The paper then applies these insights to analyse empirically the evolution of competition in the market for local bus services in London.

Link to the paper

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Pre‐commercial Procurement, Procurement of Innovative Solutions and Innovation Partnerships in the EU: Rationale and Strategy

BY ELISABETTA IOSSA, FEDERICO BIAGI AND PAOLA VALBONESI

ABSTRACT: We consider alternative European public procurement mechanisms for acquiring R&D services and innovative solutions, focusing on Pre-commercial Procurement, Public Procurement of Innovative Solutions and Innovation Partnerships. For each of these mechanisms, we identify conceptually strengths and weaknesses. We highlight the role played by (i) economies of scope and externalities between R&D and largescale production; (ii) degree of specificity of the innovation; (iii) role of SMEs in the market and level of market competition; (iv) risk of market foreclosure and supplier lock-in. This article contributes to the literature on incentives in demand-side innovation policy by tapping into the contractual design features and by offering relevant implications for academics and policy makers.

Economics of Innovation and New Technology_

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Corruption in PPPs, Incentives and Contract Incompleteness

International Journal of Industrial Organization

BY Elisabetta Iossa and David Martimort

Abstract. We analyze risk allocation and contractual choices when public procurement is plagued with moral hazard, private information on exogenous shocks, and threat of corruption. Complete contracts entail state-contingent clauses that compensate the contractor for shocks unrelated to his own effort. By improving insurance, those contracts reduce the agency cost of moral hazard. When the contractor has private information on revenues shocks, verifying messages on shocks realizations is costly. Incomplete contracts do not specify state-contingent clauses, thereby saving on verifiability costs. This makes incomplete contracts attractive even though they entail greater agency costs. Because of private information on contracting costs, a public official may have discretion to choose whether to procure under a complete or an incomplete contract. When the public official is corrupt, such delegation results in incomplete contracts being chosen too often. Empirical predictions on the use of incomplete contracts and policy implications on the benefits of standardized contracts are discussed.

Contract and Procurement Design for PPPs in Highways: the Road Ahead

Journal of Industrial and Business Economics, 2015

BY Elisabetta Iossa

Abstract. We review international practice in concession-based public private partnerships (PPPs) for highways, in the light of the economic theory of incentives, procurement and regulation. In particular, we analyse alternative funding mechanisms to cover highway costs, and their impact on demand risk allocation, incentives, cost of capital, and likelihood of renegotiation. We note how real tolls must pursue a number of contrasting objectives, which may be best served by introducing tariff discrimination. We discuss alternative tariff regulations used in practice and warn against tariff mechanisms that transfer demand risk to users and depart from the principles of price cap regulation. We highlight that it is desirable to transfer some traffic risk to the concessionaire but the level of risk transfer should be lower at the beginning of the contract, especially for greenfield projects where little demand information is initially available. We discuss the procurement of highway PPPs, focusing on the choice of the bidding variables, and on the distortions that renegotiations introduce at bidding stage. We stress the importance of strong institutions and absence of political interference in regulatory matters, and we highlight the benefit of respecting and standardizing contract terms.

The Simple Micro-Economics of Public Private Partnerships, Journal of Public Economic Theory, 2015

BY Elisabetta Iossa and David Martimort

Abstract. We build on the existing literature in Public Private Partnerships (PPP) to analyze the main incentive issues in PPPs and the shape of optimal contracts in those contexts. We present a basic model of procurement in a multi-task environment in which a risk averse firm chooses non-contractible efforts in cost reduction and quality improvement. We first consider the effect on incentives and risk transfer of bundling building and management stages into a single contract, allowing for different assumptions on feasible contracts and information available to the government. Then we extend the model in novel directions. We study the relationship between the operator and its financiers and the impact of private finance. We discuss the trade-off between incentive and flexibility in PPP agreements and the dynamics of PPPs, including cost overruns. We also consider how institutions, and specifically the risk of regulatory opportunism, affect contract design and incentives. The conclusion summarizes policy implications on the desirability of PPPs.

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Building Reputation for Contract Renewal: Implications for Performance Dynamic and Contract Duration,

Journal of the European Economic Association, 2014, 12(3), 549-574.

BY Elisabetta Iossa and Patrick Rey

Abstract. We study how career concerns affect the dynamics of incentives in a multi-period contract, when the agent's productivity is a stochastic function of his past productivity and investment. We show that incentives are stronger and performance is higher when the contract approaches its expiry date. Contrary to common wisdom, long-term contracts may strengthen reputational effects whereas short-term contracting may be optimal when investment has persistent, long-term effects.

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Risk Allocation and the Costs and Benefits of Public-Private Partnerships

RAND Journal of Economics, 2012, 43(3), pp: 442-474.

BY Elisabetta Iossa and David Martimort

Abstract. We study the agency costs of delegated public service provision, focusing on the link between organizational forms and uncertainty at project implementation. We consider a dynamic multitask moral hazard environment where the mapping between effort and performance is ex ante uncertain but new information may come along during operations. Our analysis points out at the efficiency gains that bundling planning and implementation - as under Public Private Partnerships - can bring in terms of better project design and lower operational costs. Bundling also results in increasingly better performance as uncertainty is reduced by growing experience in the sector. Bundling should instead be viewed with caution when the private sector seeks to radically innovate on public service provision or to introduce new services but lacks the knowledge and expertise to anticipate the impact of the innovative design/procedure/technology on the cost of operations. The compounding of asymmetric information ex post plus moral hazard and renegotiation may generate diseconomies of scope in agency costs which, for high operational risk, can make unbundling optimal. In this context, the use of private finance can help re-establishing the benefit of bundling only if lenders have sufficient expertise to help assessing project risks.

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