When and Why do Governments Pay More? Evidence from Brazil
(with Augustin Chaintreau, Joana Naritomi, and Dimitri Szerman)
This paper explores a unique market-wide view of public procurement using administrative data generated by the mandatory use of electronic invoicing in Brazil to study the São Paulo state procurement of pharmaceutical products. This data allows us to observe private sector transactions by government suppliers, as well as by firms that are not government suppliers but do transact goods purchased by the government. Thus, we can benchmark Business-to-Government (B2G) against Business-to-Business (B2B) transactions, identify the pool of potential suppliers, and determine if and when the government accesses suppliers with better prices. We begin by leveraging recent advances in Natural Language Processing to classify products based on the free-text descriptions in invoices. Then, we describe the circumstances under which governments pay more (or less) for goods in the pharmaceutical market. On average, we find that the government pays 13.6% more than the private sector for the same goods. However, when controlling for supplier fixed effects, this difference drops to -8%, indicating that while the government selects higher-priced suppliers, it successfully negotiates lower prices from those contracted. This suggests that obtaining better value-for-money depends largely on the government's access to more competitive sellers. We also find substantial heterogeneity across products and some evidence that a larger government presence in a market is associated with a smaller supplier selection issue and greater price advantages in public versus private purchases from the same supplier.