Essays on Public Procurement

This thesis studies competition in public procurement. It consists of three essays, each of which looks at the competitive process in public procurement from a different perspective.

In the first essay, Janne Tukiainen, Kirsi-Maria Halonen and I study the extent and determinants of competition and its role in determining prices in public procurement using uniquely comprehensive and rich data from Finland and Sweden. We supplement our study with qualitative interviews. Competition is extremely low in both countries. All regions and contracting authority types, and most industries face the issue. In addition, bidders are typically heterogeneous in size, which likely further limits competition. Competition seems to work as expected as (standardised) prices decrease with the number of actual and potential bidders. The perceived reasons for lack of competition are many and vary between industries but are typically related to communication practices and professionalism in public procurement. Accordingly, we show using contracting authority office level norms as instrumental variables that the use of scoring auctions is detrimental to competition, especially in industries where their use is not typical. Bidder friendly dialog, strategies and practices are proposed as remedies.

In the second essay, Janne Tukiainen, Sebastian Blesse, Albrecht Bohne, Leonardo M. Giuffrida, Ari Luukinen,  Antti Sieppi, and I study preferences of 900+ real-world public procurement officials in Finland and Germany. The officials report having sizeable discretion and minimal extrinsic incentives. Through conjoint experiments, we identify the relative importance of multiple features of the procurement outcomes. Officials prioritise avoiding unexpectedly high prices over seeking low prices. Avoiding winners with previous poor performance is the most important feature. Officials avoid very low competition, while litigation risks and regional favouritism matter less. Preferences and office interests appear well-aligned among bureaucrats.

The third essay examines the consumer side of the public procurement process and what happens after the procurement auction is concluded. In the essay, I study the Finnish market for physiotherapy services, which can be divided into a private market and two public procurement markets - one organised by municipalities, the other by the Finnish social security institution. Using data on prices and firm characteristics across five regions, I estimate the demand in the three markets and find the following: First, unobserved quality is positively correlated across markets; second, demand is very price-elastic in the private market, somewhat price-elastic in the municipal market where civil servants choose the physiotherapist, and inelastic in the market operated by the Finnish social security institution where consumers choose their therapist without knowing or paying the price. These findings indicate that freedom of choice might come with a price when consumers themselves bear no costs.

Contact Jan Jääskeläinen

More information: jan.jaaskelainen@aalto.fi