Reducing Government Spending with Privatization Competitions : A Study of the Department of Defense Experience

In a privatization competition, private contractors bid against an in-house team to perform a governmental function currently performed by the in-house team. The Department of Defense initiated 3,500 privatization competitions from 1978 to 1994, generating annual savings of $1.46 billion. We estimate a reduced-form model of the savings from these competitions which takes into account (1) premature cancellation of some competitions and (2) censoring of the in-house bid at current cost. The Department of Defense maintains a list of candidates for future privatization competitions. Using our model, we forecast annual savings of $5.74 billion if privatization competitions were completed for all functions on this list