Accounting Information Provision and Competitive Bidding: the Case of Procurement Contract Negotiations

This paper studies how private accounting information disclosure requirements affect the award and execution of supply contracts using a quasi-experimental setting related to government procurement. Buyer-supplier relationships are frequently marked by asymmetric information held by suppliers about their prices. To alleviate this, buyers often require a minimum number of competing bids be received, or else they require suppliers to privately disclose information supporting their proposed prices. The effect of such a buyer policy on competition is unclear. Such a policy may drive buyers to promote competition, but information requirements can also dissuade potential suppliers from competing due to data gathering and proprietary costs. I empirically examine the net effects of such a policy in the context of a federal regulation that mandates contractors provide accounting data supporting their proposed pricing unless there is a sufficient number of competing bidders, for contracts above a certain price threshold. I find that above-threshold contracts experience greater competition than below-threshold contracts. Further, I find improvements in contract completeness (i.e., decreased reliance on cost-plus contracts) and performance (i.e., less frequent re-negotiations and cost overruns), suggesting that these data requirements cause scarce buyer attention to become more directed towards above-threshold contracts. My results differ among subsamples in a manner that is consistent with the documented effects being driven by this data policy.