Rethinking Discretion in Public Procurement

Exploiting a rule in Brazil that waives competitive bidding for small-value purchases, I find evidence of an efficiency-quality trade-off when government agencies have more flexibility in awarding public procurement contracts. Products purchased with higher discretion are 23 percent more expensive than those purchased via auctions. However, at least half of this overpricing is explained by the purchase of higher-quality products. This trade-off is more pronounced when government agencies strategically design procurements to fall below the small-value purchase threshold. Finally, I document that discretion may improve the quality of public services provision. Public hospitals that use discretion to purchase better essential medicines in procurements experience decreased inpatient mortality