The Impact of Industry Consolidation on Government Procurement: Evidence from Department of Defense Contracting
We study the relationship between market structure and public procurement outcomes. In particular, we ask whether and to what extent consolidation-driven increases in industry concentration affect the way in which the government procures its goods and services. We focus on the defense industry, by far the largest contributor to federal procurement spending in the U.S. This industry experienced a sharp increase in the level of concentration during the 1990s, driven by a series of large mergers between defense contractors. Using detailed microdata on Department of Defense (DoD) contract awards, we estimate the causal effect of industry concentration on a series of procurement outcomes, leveraging the differential impact of these mergers across product markets. We find that market concentration caused the procurement process to become less competitive, with an increase in the share of spending awarded without competition, or via single-bid solicitations. Increased concentration also induced a shift from the use of fixed-price contracts towards cost-plus contracts. However, we find no evidence that consolidation led to a significant increase in acquisition costs of large weapon systems, nor to increased spending at the product market level. We infer that the government’s buyer power, especially relevant in this context given the government is often the only purchaser, constrained firms from exercising any additional market power gained by consolidation.
We thank seminar participants at the NBER Summer Institute’s Economics of National Security meeting. We are particularly grateful to Jake Shapiro for thoughtful comments, and to Peter Newell and Alison Hawks for helping us understand the institutional environment. We also thank George Holderness, Cameron Slovic, and Elizabeth Trinh for outstanding research assistance. We gratefully acknowledge research funding from the Washington Center for Equitable Growth. The authors (and none of the institutions listed above) are responsible for any errors or omissions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- The share of contract dollars awarded to the five largest DoD contractors rose from 21.7 percent in 1990 to 31.3 percent in 2000...
Rodrigo Carril & Mark Duggan, 2020. "The impact of industry consolidation on government procurement: Evidence from Department of Defense contracting," Journal of Public Economics, vol 184.