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The Role of Reputation and Corruption in Procurement

Periodic Reporting for period 4 - REPCOR (The Role of Reputation and Corruption in Procurement)

Período documentado: 2020-11-01 hasta 2021-07-31

Public sector procurement accounts for approximately 20 percent of GDP in developing countries and 10-15 percent in developed countries. Nearly all activities in which the public sector is involved, from defense to transportation, from education to healthcare, require the public sector to procure construction works, goods and services from private contractors. Moreover, during the recent financial crisis, public procurement has often been invoked as an instrument to sustain demand or even promote growth by fostering innovation.

The proper design of procedures through which procurement takes place is crucial to avoid waste and enhance social welfare. The appropriate selection of contractors clearly plays a prominent role among these procedures and, indeed, a large body of academic and policy research has been devoted to the design of tender awarding rules (Laffont and Tirole, 1993). Preventing corruption and ensuring that the selected contractor will comply with the obligations in its bid are often seen as major goals of a successful awarding procedure.
The roles of corruption and reputation within a procurement system are distinct, but closely connected. Price-based auctions are indeed a transparent mechanism that fosters competition between contractors and, under certain conditions, can be the “optimal” procurement mechanism (Myerson, 1981). Nevertheless, the lack of flexibility in the choice of contractors might imply that a low price at the time of the auction results in a low delivered quality. Past performance of the contractor is thus one of the prominent tools through which contractors can be given the right incentives. The choice of how to integrate reputation within a transparent procedure is, however, not trivial and a poor design can foster corruption and inefficiency. In the US, a major reform in the 1990s, intended to reduce the rigidity of procurement procedures, introduced into the Federal Acquisition Regulations more flexible purchasing methods, similar to private sector practices, among which was the placement of a stronger weight on suppliers' past performance (Kelman, 1990).

This research project has delivered a series of research papers, roughly subdivided into three groups of studies (components) that advance the frontier of our understanding of the economics of public procurement. These three components are as follows:
- Component 1: The Role of Reputation When Awarding Contracts. Projects of this group study how firms respond to the announcement of a switch from price-only auctions to scoring rule auctions weighting past performance.
- Component 2: Corruption in Procurement Auctions: Detection, Effects and Remedies. This part develops new measurements of corruption risk in procurement and quantifies its presence across different awarding methods.
- Component 3: A Welfare Analysis of Healthcare Procurement Regulations: The Case of Medical Devices. This part analyses the public procurement of medical devices in Europe with a special emphasis on the interaction between the market structure and procurement outcomes.

The findings in the different research paper are of major relevance for the progress of research in both public and private procurement as well as for policy, especially in the EU.
The research achievements on the three components of the research project can be summarized as follows: 2 published research papers, 2 revise-and-resubmit paper, 1 reject-and-resubmit paper, 4 submitted papers awaiting the first decision, 4 policy contributions published, 2 working papers at the working progress stage, multiple press articles, 50 academic seminars delivered, 20 conference presentations, 5 policy seminars delivered, 8 PhD students successfully lead into academic or private sector jobs, multiple master and undergraduate students led to PhD programs. More in details, among the main achievements of the research conducted under the grant, those worthier of being emphasized are: (1) opening up a new research agenda on the role of public buyers in determining procurement outcomes (see the papers “Bureaucratic Competence and Procurement Outcomes” and “Buyers' Role in Innovation Procurement”); (2) having contributed to a more effective understanding of corruption risks in public procurement (see the papers “Corruption Red Flags in Public Procurement: New Evidence from Italian Calls for Tenders” and “Gender and bureaucratic corruption: Evidence from two countries”); (3) having offered the first, long-run evaluation of the benefits of including reputational mechanisms into public procurement (see the paper “Past Performance and Procurement Outcomes”); (4) having contributed to the study of the interplay between market structure and procurement outcomes (see the papers “Procuring Medical Devices: The Price Effect of Mergers among Orthopedic Prostheses Producers” and “Procuring Medical Devices: Evidence From Italian Public Tenders”); (5) having contributed to the international policy debate on public procurement in times of emergency and the Covid19 crisis (see the policy paper “Emergency procurement and the Covid19 crisis: insights from Italian administrative data”); (6) having contributed to the policy debate in Italy about better procurement regulation (see the paper “Appalti e Corruzione: Alcune Evidenze sulla Penetrazione Criminale negli Appalti di Lavori”).
Each of the research papers produced under the grant offers some advancement of the relevant literature. In particular, the paper that most likely will be highly impactful in the future is “Bureaucratic Competence and Procurement Outcomes,” (with L. Giuffrida, E. Iossa, V. Mollisi and G. Spagnolo). This paper is the opening up of a new research agenda on the role of public buyers in determining procurement outcomes. In fact, economist have traditionally studied procurement auctions as an application of the tools of Industrial Organization and Game Theory where the focus is on the strategic interaction between the bidders. This has been the same approach that I followed in my own research prior to working on the ERC grant.
R&D procurement). This paper generated a follow up work focusing on the procurement of R&D contracts where the relevance of public buyers for R&D specific outcomes has been quantified with regard to patents (and their citations and claims): “Buyers' Role in Innovation Procurement,” (with G. de Rassenfosse, L. Giuffrida, E. Iossa, V. Mollisi, E. Raiteri and G Spagnolo). The academic impact of this work is evident from the rapidly growing amount of citations by other researchers (about 70 citations in Google Scholar at the time of writing). Moreover, the policy relevance is testified by the invitation to present the results from study at multiple, high-level policy events.

Beside the innovativeness of the results described above, the research produced a broad set of papers advancing our understanding of multiple aspects of the working of public procurement systems, especially with regard to how to deal with corruption risks and with the past performance of suppliers. Overall these result advance the literature in directions that had been little explored and do so thanks to the effort of having collected new and particularly detailed data, both data on corruption.