Cost-Benefit Analysis of Bid Protests: A Representative Bidder Model

Abstract

Most countries allow disappointed bidders to protest public procurements. The dual goal is to reduce favoritism, reduce fraud and errors, and increase competition. The legal literature that underpins protest systems for the U.S. Federal Government and European Union generally reflects these two goals. The hypothesis is that allowing disappointed bidders to protest public procurements serves as a decentralized oversight mechanism that increases transparency and accountability, which encourages vendor participation. This study offers a cautionary tale for any government agency, country, or international institution that relies on, and/or promotes, bid protests to improve public procurement outcomes. The goal is to explore costs and benefits of bid protests for governments and taxpayers. As a first step, a probabilistic, micro-economic, partial equilibrium, representative bidder model is developed to help evaluate protest systems. The model reveals multiple unintended consequences of protest systems and suggests alternative approaches to improve public procurement outcomes.