Monitoring Competitive Bidding in the Public Sector

This paper investigates the impact of program budget size on monitoring and competitive bidding in the public sector. A sequential game is developed involving a ministry and bureau strategically interacting in the provision of a public sector good. The ministry copes with imperfect information about the bureau's costs by choosing to monitor or to conduct a first price sealed bid auction between the bureau and a set of firms. In this respect, this study represents an extension of the Niskanen budget maximizing bureau framework. The results predict that the ministry will tend to conduct competitive bidding at low and high levels of budgetary allocation. Otherwise, the bureau is monitored. Second, increases in the budget expand the range of costs over which the bureau can win the competitive bid. Third, increases in management compensation tends to reduce the spread between the bureau's costs and its reported cost for providing the public sector good.