Why Do Almost Half of Government Contracts Have No Competition?

Karam Kang, Tepper School Associate Professor of Economics, speaks about her research on the process of procuring government contracts.

Video Transcript

I am an applied microeconomist, and my research focuses on the decision-making of public officials, or lawmakers, especially when they are strategically interacting with firms.

The name of my paper is "Winning By Default: Why Is There So Little Competition In Government Procurement?" About 45% of the contracts have only one bid, partly due to a reform that happened in Clinton Administration. There is a lot of discretion that contracting officers have in deciding how much competition they want to have, and in negotiating contract terms with a potential contractor.

Taxpayers would like to reduce the costs, especially how much the government pays for procurement, but contracting officers, the government officials here, may have different interests. Having more bids requires longer periods of time to get more bids. Also processing can be costly. Lastly, there is some risk of having bid protest, that losing bidders could protest.

One part of cost overrun is about expected events, like delays, and you make the price to depend on these expected delays, and that is the way a negotiation happens, and this negotiation can reduce the total cost.

It is true, having two bids will be cheaper than having one bid, but having one bid is really not increasing that much of price, compared to two-bid contracts. Why is that? Because contracting officers can negotiate, can figure out what kind of cost it is for you to produce, and they can negotiate the terms. That's where even without much competition, negotiation can be a solution to that.