Procurement with Manipulation

Rules constraining bureaucratic discretion may limit the misuse of public funds but may also hinder government performance. Using data from Italian public works, we study whether and which procuring administrations manipulate the value of contracts to avoid crossing regulatory thresholds that limit discretion, and how this impacts procurement outcomes. We use bunching estimators to document substantial manipulation just below these thresholds, performed by administrations led by appointed officials but not by elected ones. We estimate the effects of manipulation, finding that it increases the use of discretionary procedures (restricted auctions), thereby reducing the number of bidders, and with mixed effects on rebates and positive effects on other outcomes. Specifically, it reduces the length, delays in delivery, and cost overruns of works and it increases repeated awards of contracts to less financially risky suppliers. We use a reform that shifted the discretion threshold to cross-validate our estimates. The reform reduced manipulation and the use of discretion, and worsened procurement outcomes, especially for administrations with appointed officials. This evidence is consistent with appointed administrators circumventing excessively strict rules, mainly to improve procurement outcomes, and with electoral incentives preventing other administrators from doing so. A simple procurement model where administrations may choose to manipulate at different costs provides structure to this interpretation.