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Procurement Markets

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Public and private procurement constitutes a substantial fraction of economic activity but practices such as collusion, bid-rigging, fraud and corruption prevent efficient procurement. The stronger the incentive on the overall enterprise for efficiency, the stronger the incentive to control all inefficient procurement practices including corruption. Public procurement processes are often constrained by various regulatory requirements such as transparency requirements. Public procurement may also be used as a tool to address other public policy objectives, such as environmental, affirmative action or industrial policy objectives. Some public procurement markets exhibit features which favour collusion among the bidders: there are relatively few potential sellers who encounter each other regularly in different procurement markets in different places and over time, with relatively high barriers to entry and a high degree of transparency. Broadly speaking, collusion in can be restricted through policies which seek to lower barriers to entry; policies which reduce the ability of bidding cartels to detect and punish defection; and policies which enhance enforcement. Lowering barriers to entry has the double advantage of both improving the efficiency of the bidding process and reducing the likelihood of successful collusion. Barriers to foreign participation in procurement should be eliminated. Policies which limit the amount of information available about bidding outcomes may hinder bidding cartels. It may be possible to control corruption and favouritism without full transparency by limiting disclosure to designated procurement-oversight agencies.

Page Count: 41
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Document Type: Review Article

Publication date: December 1, 1999

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