Third-Party Opportunism and the (In)Efficiency of Public Contracts

Abstract

The lack of flexibility in public procurement design and implementation is a political risk adaptation by which public agents limit hazards from opportunistic third parties --- political opponents, competitors, interest groups --- and externalize the associated adaptation costs to the public at large. Public agents endogenize the likelihood of opportunistic challenge lowering third parties’ expected gains and increasing litigation costs. We provide a comprehensible theoretical framework with empirically testable predictions: scrutiny increases public contracting efficiency in costly litigation environments, concentrated (politically) contestable markets, and with upwardly biased beliefs about benefits of challenge.