Association for Public Policy Analysis & Management

A common assumption is that governments are generally less efficient than private sector businesses, even when both perform similar activities. Perhaps nowhere is this complain more pronounced – and its implications more observable – than in purchasing, particularly when governments seem to pay so much more than businesses for common goods and services. Even when purchasing the same products, business to business sales are more efficient because they respond more to market pressures, while governments pay more because they must meet stakeholder demands for quality along competing dimensions, navigate a more complex regulatory thicket, and face markets with less competition among sellers. In this paper, we present a survey experiment in which Danish businesses managers estimated four types of costs – measuring service quality, flexibility, provider scarcity and lock-in, and stakeholder sensitivity – when selling to either another business or a government purchaser. The results show that across all four categories, business reported identical costs when selling to other businesses as when selling to governments A second follow up study, to be conducted in the Spring of 2018, uses another survey experiment to determine whether businesses spend more on transaction costs when selling to government buyers than when selling the same goods and services to business. These results are noteworthy because they come from a European Union country, where governments are bound by a common, and relatively stringent, edifice of procurement regulations. Taken together, these results on whether governments pay higher prices due to differences in what they are purchasing or because of the transaction costs imposed by their regulatory and political environment.