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, and 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.