Reducing Transaction Costs in Government Procurement

4 March 2009 at 1:30 pm Michael Sykuta 6 comments

| Mike Sykuta |

Lest anyone think I (or, by association, O&M) am just a disgruntled Obama-basher, let me applaud the Administration’s announcement today of its intent to overhaul the ways in which the government contracts for goods and services, particularly in the Department of Defense. I suspect the collective “we” are all in favor of identifying methods and processes that will reduce transaction costs (and overall costs) in government procurement programs.

On this point, there is economic research that should help guide the Administration’s deliberations. To wit, William Rogerson provides a pretty thorough assessment of the economic incentives in defense procurement (JEP, 1994) and has a follow-up article on the optimal structure of fixed-priced cost reimbursement contracts (AER, 2003). Bajari and Tadelis (RAND J., 2001) provide a study of incentives versus transaction costs in procurement contracts. Although focused on private-sector construction, their findings are likely relevant to government procurement as well. Important lesson: cost-plus is not necessarily bad.

Entry filed under: Former Guest Bloggers, Institutions, Law and Economics, New Institutional Economics, Public Policy / Political Economy.

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6 Comments Add your own

1. Peter Klein | 4 March 2009 at 2:17 pm

I suspect the collective “we” are all in favor of identifying methods and processes that will reduce transaction costs (and overall costs) in government procurement programs.

Speaking for my part of the “we,” I’d say yes, kinda sorta, depending on what goods and services are being produced. I do share Bruce Benson’s reservations.
2. sykutam | 4 March 2009 at 3:16 pm

Caveat duly noted…and sentiment shared. Given things will be procured, I would like it to be done as efficiently as possible. That is not to say that I believe all things that will be procured should be.
3. david | 4 March 2009 at 7:32 pm

I look forward to taking a closer look at that Benson piece. I always use this Shleifer piece from JEP on the state v. private provision of government services, because I think students find the framework is intuitively plausible. I was reminded of this the other day when a student who had a class with me last year brought it up in the context of utility deregulation in my regulation class.

As an aside, I always thought the Journal of Libertarian Studies was an anthropology journal concerned with the study of how libertarians behave in the wild.
4. Bart | 5 March 2009 at 4:41 am

David, what Schleifer piece are you referring to? I’m interested
5. david | 5 March 2009 at 11:48 am

Andrei Shleifer, “State versus Private Ownership,” Journal of Economic Perspectives, Vol. 12, No. 4 (Autumn, 1998), pp. 133-150

It’s part of a JEP symposium on firm boundaries, if I recall correctly. Nothing more than a simple make-or-buy setup, with the question *if* the government is going to provide a service, should it do it in-house or contract it out? He draws on some of his work on prisons and corruption and argues pretty strongly for private provision of public schools.
6. Gary | 16 April 2009 at 2:55 pm

I am extremely apprehensive about buying into the whole projected savings of over $40 billion dollars which is the expected result from Obama’s ‘cost crackdown’. Also the direct comments about opening up the contracting processes for small businesses… I will believe that when I actually see it. I have heard a lot of good things regarding small business owners, but have yet to actually see any action. Thanks.