Oriana Bandiera and Andrea Prat (joint with Tommaso Valletti): 'Active and Passive Waste in Government Spending: Evidence from a Policy Experiment'

A paper by Oriana Bandiera and Andrea Prat (joint with Tommaso Valletti) Active and Passive Waste in Government Spending: Evidence from a Policy Experiment is forthcoming in the American Economic Review.

The authors propose a distinction between active waste and passive waste as determinants of the cost of public services. Active waste entails utility for the public decision maker (as in the case of bribery) whereas passive waste does not (as in the case of inefficiency due to red tape). To assess the empirical relevance of both forms of waste, the authors analyze purchases of standardized goods by Italian public bodies and exploit a policy experiment associated with a national procurement agency. A revealed preference argument implies that if public bodies with higher costs are more likely to buy from the procurement agency rather than from traditional suppliers, cost differences are more likely to be due to passive waste. The authors find that: (i) Some public bodies pay systematically more than others for observationally equivalent goods and such price differences are sizeable; (ii) Differences are correlated with governance structure: the central administration pays at least 22 per cent more than semi-autonomous agencies (local government is at an intermediate level); (iii) The variation in prices across public bodies is principally due to variation in passive rather than active waste; (iv) Passive waste accounts for 83 per cent of total estimated waste.