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may create significant scope for de facto discrimination in procurement.33  It is unlikely that the precise nature of contract offered by a government can be specified by an international agreement. But there could be a provision which, in the case of fix-price contracts, allowed any ex post bail-outs to be challenged by ex ante competitors.

Restrictions on the method of procurement

In some minor ways, the GPA's restrictions on the method of procurement may limit the ability of the procurer to alleviate problems of asymmetric information.  However, there remains significant scope for remedying these problems in other ways.

Article XV of the GPA contains an exhaustive list of circumstances in which Governments may resort to limited tendering procedures "where the entity contacts suppliers individually."  For instance, the need for standardization and interchangeability, as for instance when existing computer facilities have to be upgraded, has been recognized.  There are, however, factors which may justify limited procurement rather than competitive tendering which have not been recognized.34  For instance, the GPA leaves no scope for limited procurements from a single source when this serves a useful strategic function.  Repeated procurement from the same source coupled with the threat of termination may alleviate moral hazard problems.

However, the stipulation that "...nor shall any procurement be divided, with the intention of avoiding the application of this Agreement" (Article II.3) does not limit the scope for exploiting the benefits of yardstick competition (see Laffont and Tirole, 1993;  and Vickers and Yarrow, 1988).  The latter is a method of remedying informational asymmetries by

    (Surprisingly, there does not yet seem to be any formal empirical study of cost overruns which would enable us to judge whether they are a common occurrence and whether the frequency and magnitude of overruns vary by industry or country.  But anecdotal evidence suggests that they are an important phenomenon, at least in procurement contracts pertaining to defence (still mostly outside the GPA) and construction (now covered by the GPA).  For instance, Scherer (1964, p. 27) reports that actual costs in the 12 weapon system developments covered by his case studies exceeded original contractor predictions by 220 per cent on the average, and actual costs turned out to be less than original predictions in only one program.  More recently, Aviation Week and Space Technology (30 July 1990) reported that General Dynamics Corporation faced a pretax cost overrun of at least $450 million by in its contract for the United States Navy's A-12 advanced attack aircraft.  The same journal (30 January 1989) reported that additional government funds were needed to overcome a $1.12 billion cost overrun for the second batch of multirole combat aircraft ordered by the Swedish Government.  McKay (1983) provides evidence of cost-overruns in the electrical industry.  See also Fox (1988) and McAfee and McMillan (1988).

    (An obvious one is that the administrative cost of limited tendering could be lower.  But it was presumably felt that the additional costs of competitive tendering would be more than offset by the gains from safeguarding against latent discrimination.


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