How Managers Can Use Purchaser Performance Information to Improve Procurement Efficiency

We examine the effect of performance monitoring in public procurement through the lens of organizational culture in a principal-agent model where the manager (principal) and buyers (agents) may have different beliefs about how much the government values efficiency. We show that the effect of performance information not only increases efficiency but is greater when the buyer’s belief is stronger than the manager’s belief. We leverage a new e-procurement system in Chile to test these ideas by randomizing monthly reports on the purchasing performance of buyers and further whether the individual performance reports were disclosed to managers. We find that the reports generated sizable reductions in overspending — with savings reaching a 15% reduction or 0.1% of GDP — but only when individual performance was observable to managers. This is consistent with extrinsic motivation rather than intrinsic motivation driving buyer behavior. Consistent with the theoretical model, we also find that the gain in efficiency is concentrated in procurement units where buyer belief that the government cares about efficiency is stronger than manager belief. Our results highlight the key role played by organizational culture in mediating the impact of purchasing performance information on preventing the misuse of public resources.