Active and Passive Waste in Government Spending: Evidence from a Policy Experiment

We propose a distinction between active waste and passive waste as determinantsof the cost of public services. Active waste entails utility for the publicdecision maker (as in the case of bribery) whereas passive waste does not (asin the case of inefficiency due to red tape). To assess the empirical relevanceof both forms of waste, we analyze purchases of standardized goods by Italianpublic bodies and exploit a policy experiment associated with a national procurementagency. A revealed preference argument implies that if public bodieswith higher costs are more likely to buy from the procurement agency ratherthan from traditional suppliers, cost differences are more likely to be due topassive waste. We find that: (i) Some public bodies pay systematically morethan others for observationally equivalent goods and such price differences aresizeable; (ii) Differences are correlated with governance structure: the centraladministration pays at least 22% more than semi-autonomous agencies (localgovernment is at an intermediate level); (iii) The variation in prices across publicbodies is principally due to variation in passive rather than active waste;(iv) Passive waste accounts for 83% of total estimated waste.[...]