State Aid in Government Procurement

Abstract

We revisit the topic of national favoritism in government procurement in the context of international trade, focusing on the impact of a participation/transition cost difference between domestic and foreign firms. Our public tender model generates two kinds of equilibrium outcomes, where a higher participation cost foreign firm is more aggressive in participation in one kind, but less aggressive in another kind. However, the latter equilibrium dissipates when the difference in the transition costs becomes sufficiently large. Thus a favoritism policy would probably result in unintended consequences in an undesired equilibrium. Some simulation results are provided to quantify the restrictions on the model parameters that eliminate one non-intuitive equilibrium.