Audit design can unintentionally creates incentives for simpler and less competitive procurement processes

Read “Distortion by audit: Evidence from public procurement” by Maria Paula Gerardino,  Stephan Litschig and Dina Pomeranz here.

Audits are intended to test whether public procurement is working as well as it should, but can the auditing process itself make procurement less efficient? In this VoxDevTalk, Dina Pomeranz discusses her work with co-authors Maria Gerardino and Stephan Litschig in which they examine the causal impact of audits on public procurement in Chile. They find that the content and design of audits in public procurement inadvertently discouraged the use of more transparent and efficient public competitive auctions in favour of more manipulable direct contracts. 

Their investigation discovered that because competitive auction processes have more auditable steps, they also have a higher risk of finding infractions than the awarding of direct contracts. They highlight that the focus on rule compliance in auditing practices does not consider the incentives created from the audit process itself and can consequently lead to less efficient procurement. Their results illustrate that audits are not costless neutral mechanisms establishing whether or not rules are being followed, but their design can also create incentives that encourage the use of simpler, less risky procurement practices. The research therefore emphasises the need to incorporate more economists and behavioural scientists in audit design to counterbalance this.

Public procurement Audit Chile Public spending