Public Procurement as Auction – Theoretical Models and Practical Problems

Abstract

This paper aims to show how the theory of optimal auctions can be applied to modelling public procurement. The first part of the paper focuses on the problem of choosing the optimal procurement method. our hypothesis is that it could improve social welfare if buyers had a wider set of procedures to choose from. The second part of the paper discusses the hungarian practice of bidders and purchasers manipulating the outcome of the process by withdrawing from contracts after they have been awarded. We show that there is no economic reason for making this possible without a charge, and that penalising this behaviour would also reduce the risk of corruption.