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

Abstract

The United States, the United Nations (UN), the Organization for Economic Cooperation & Development (OECD), and World Trade Organization (WTO), all authorize losing bidders to protest public procurements. The dual goal is to reduce government fraud and errors, and increase competition. The hypothesis is that bid protests serve as a decentralized mechanism that increases government accountability, and encourages vendor participation. An extensive legal literature has emerged to support the benefits of protest systems, but it is surprisingly silent about the costs. The goal of this economic study is to examine costs as well as benefits of bid protests. The static, probabilistic, micro-economic, partial equilibrium, representative bidder model developed in this paper offers a cautionary tale for government agencies, countries, and international institutions that rely on bid protests to improve public procurement outcomes. Protest systems appear to be an example of a well-intentioned policy that generates significant unintended consequences. This study reveals multiple potential deficiencies of protest systems, and suggests alternative approaches to improve public procurement outcomes.