Court Efficiency and Procurement Performance

• Author: Decio Coviello,Paola Valbonesi,Giancarlo Spagnolo,Luigi Moretti
• Published date: 01 July 2018
• DOI: http://doi.org/10.1111/sjoe.12225
• Date: 01 July 2018

©The editors of The Scandinavian Journal of Economics 2017.

Scand. J. of Economics 120(3), 826–858, 2018

DOI: 10.1111/sjoe.12225

Court Efficiency and Procurement

Performance*

Decio Coviello

HEC Montr´eal, Montr´eal, QC H3T 2A7, Canada

decio.coviello@hec.ca

Luigi Moretti†

Panth´eon-Sorbonne University (Paris I), FR-75013 Paris, France

luigi.moretti@univ-paris1.fr

Giancarlo Spagnolo‡

Stockholm Institute of Transition Economics (SITE), SE-113 83 Stockholm, Sweden

giancarlo.spagnolo@hhs.se

Paola Valbonesi§

University of Padova, 35123 Padova, Italy

paola.valbonesi@unipd.it

Abstract

Disputes over penalties for breaching a contract are often resolved in court. A simple

model illustrates how inefficient courts can sway public buyers from enforcing a penalty

for late delivery in order to avoid litigation, thereby inducing sellers to delay contract

delivery. By using a large dataset on Italian public procurement, we empirically study the

effects of court inefficiency on public work performance. Where courts are inefficient,

we find the following: public works are delivered with longer delays; delays increase

for more valuable contracts; contracts are more often awarded to larger suppliers; and

a higher share of the payment is postponed after delivery. Other interpretations receive

less support from the data.

Keywords: Court efficiency; delay; enforcement cost; litigation; performance in contract

execution; public procurement; time incentives

JEL classification:H41; H57; K41

*Our thanks go to the three anonymous referees, to seminar participants at the “Procurement

and Corruption” workshop at the Toulouse School of Economics, the chair EPPP in Paris, the

Italian Society of Law and Economics, the “Public Procurement: Current Research Trends”

workshop in Moscow, the Pantheon-Sorbonne University (Paris 1), the ISNIE conference,

the conference of the French Economic Association, the EEA conference in Gothenburg,

and the National Research University Higher School of Economics in Perm, as well as to

A. Bennardo, R. Borsari, A. Estache, R. Camboni Marchi Adami, M. Colombo, C. Desrieux,

M. Klien, E. Iossa, S. Litschig, F. Lopez de Silanes, A. Meggiolaro, M. Moszoro, A. Nicol`o,

C. Pagliarin, E. Podkolzina, S. Rizzuto, S. Saussier, A. Shleifer, C. Staropoli, and S. Tadelis

for their comments. Valbonesi and Moretti gratefully acknowledge the financial support of

D. Coviello et al. 827

I. Introduction

Explicit contracting is a crucial governance instrument for public

procurement transactions. Concerns about accountability severely limit

civil servants’ discretion and, with it, the scope for relational contracting

(Kelman, 2002; Spagnolo, 2012). Similarly, reputational considerations

based on non-verifiable performance are rarely allowed in public

procurement.1However, contract enforcement costs can be significant

where the law court system is inefficient (Djankov et al., 2003).

Contracting parties can then choose ex post not to exercise their

contractual rights to save on enforcement costs. In public procurement,

high enforcement costs can therefore imply that buyers are unable to

effectively control suppliers’ opportunism.

In this paper, we study whether suppliers are more prone to opportunistic

behavior in public procurement when courts are less efficient. We

specifically focus on suppliers’ opportunism with regard to delivery delays.

As Lewis and Bajari (2011) stress, delivery time is often an important

quality dimension, and delays can have a significant negative impact on

end users. We first develop a stylized model in the spirit of the nuisance

claim literature (Rosenberg and Shavell, 1985) to organize the data and

guide the empirical analysis. The model also helps our understanding of

the incentives of the agents (i.e., suppliers and public buyers) involved

in the procurement process. The effects of trial duration on procurement

delays is a priori ambiguous and can depend on “who is suing who” (i.e.,

on who is the plaintiff and who is the defendant), and on other features

specific to the institutional environment such as litigation costs and their

distribution. In the Italian case, it is the contractor that must act as a

plaintiff because the contracting authority can move first by subtracting

the penalty from the contract. Under this assumption, and others chosen

to match the institutional setting from which our data originate, we derive

testable predictions relevant to the empirical analysis.

We then use a large dataset on public works collected by the Italian

Public Procurement Authority (henceforth, AVCP) for the years 2000–2006

the Italian Ministry of Education, University and Research (grant PRIN2008PYFHY/02) and

the University of Padova (grant no. CPDA084881/08);Spagnolo thanks the Swedish Research

Council (Vetenkapradet);and Coviello thanks the Canada Research Chairs program for financial

support.

†Also affiliated with Centre d’Économie de la Sorbonne, University Paris 1.

‡Also affiliated with EIEF; University of Rome “Tor Vergata”; CEPR.

§Also affiliated with National Research University Higher School of Economics, Moscow.

1This has been particularly true in Europe, where reputational considerations have typically

been seen by legislators as a tool to discriminate against foreign suppliers (e.g., EC Directives

2004/17, 2004/18, 2014/24, and 2014/25); see Butler et al. (2013) for further discussion on

recent EU regulations.

©The editors of The Scandinavian Journal of Economics 2017.

828 Court efficiency and procurement performance

to empirically investigate this relationship. AVCP maintains a centralized

electronic database containing a wide range of detailed information on

public procurement – crucial to our analysis and to any anti-corruption

activity – that are not even collected in the vast majority of other countries.

We merge this dataset with information collected by the Italian Statistics

Institute (henceforth, ISTAT) on the duration of civil trials by province

for each year. Our focus is Italy, which represents a unique laboratory for

studying the costs of an inefficient judiciary among developed countries.

Italy is a judicial outlier, twice as slow as any other member of the

OECD and characterized by large territorial and time variability in judicial

efficiency (Palumbo et al., 2013).

Our empirical findings suggest, as predicted by our model, that delays

in executing public works are positively associated with the duration of

civil trials. This effect is statistically significant, and it is robust to the

inclusion of a large set of contract, geographical, and time controls in

our regressions. We also find that the association between procurement

and court delays is stronger for larger and more complex projects. This

is also consistent with our model: as highlighted in the influential paper

by Bajari and Tadelis (2001), the more asymmetric information typical

of large/ complex contracts favors contractors in legal disputes.

Furthermore, we find that where trials take longer, contracts are more

often awarded to larger suppliers; this is in line with previous evidence

provided by Laeven and Woodruff (2007). We also find that the final

amount to be paid upon delivery is larger where the trial duration is

longer, a result which suggests that the public buyer attempts to reduce

the incentive to delay by increasing the supplier’s financial cost.

Finally, we consider different explanations and extensions of our results

on delivery delays, including corruption and public buyers’ fiscal restraints.

We find that our results are robust across model specifications and sample

selections.

Our paper relates to three main strands of economic literature. First, we

consider recent works on time incentives in public procurement contracts.

In particular, Lewis and Bajari (2011) theoretically and empirically

investigated an innovative procurement-awarding design adopted by the

California Department of Transportation that provides for explicit time

incentives. They estimate the benefits, in terms of social welfare, of

including project completion time in the auction mechanism. D’Alpaos

et al. (2013) developed a model in which – if penalties for late delivery are

included in the contract – the supplier’s choice concerning the execution

time can be investigated as a real option (i.e., a put option); in such a

setting, the supplier’s choice is affected by the volatility of investment

costs and by the enforcement of penalty clauses. Lewis and Bajari (2014)

investigated how higher penalties for delivery delays can induce greater

©The editors of The Scandinavian Journal of Economics 2017.