Curbing Agency Problems in the Procurement Process by Protest Oversight

Abstract

We study a model in which a potential bidder in a government procurement may challenge its exclusion from the procurement before a quasi-judicial board. In the case of a sole-source procurement, the excluded vendor does not know whether the decision was justified in terms of expected surplus or, alternatively, was due to an agency problem. We explain the occurrence of (i) equilibrium protests, (ii) deterrence of inefficient sole sourcing, (iii) overdeterrence (the choice of a competitive procurement when sole source would be appropriate), (iv) "buyoff" settlements (which preserve inappropriate sole-source procurement) and (v) "fedmail" settlements (which accompany appropriate sole-source procurements). Our normative analysis addresses recent legislative initiatives to reform the protest process.