Businesses' Transaction Cost Spending Is Higher When Selling to Governments: Evidence from an Experiment in Denmark

Matthew Potoski, Trevor L. Brown, Ole Helby Petersen

Publikation: KonferencebidragPaperForskning


A common assumption is that governments are generally less efficient than private sector businesses, even when both perform similar activities. Perhaps nowhere is this complain more pronounced – and its implications more observable – than in purchasing, particularly media stories report governments seemingly paying so much more than businesses for common goods and services.

In this paper, we present an experiment in which Danish businesses managers estimated their company’s transaction cost spending when selling cleaning, construction and information technology goods and services to businesses and governments. We provided managers working for Danish companies that sell to both governments and business with a scenario describing a product or service that their business typically sold to both governments and businesses. Respondents were randomly informed that the buyer was a business or a government, with all other circumstances otherwise identical. The scenario included a description of the product or service along with the total price of the contract and asked the business to estimate the amount of money it would spend on a series of management activities.

The results show that businesses selling to governments spend more about 2.5 percent more on transaction cost spending than when selling to other businesses. Our study shows that rigorous and careful analyses can provide precise, monetary estimates of these costs, are possible, and can provide better guidance for evaluating institutional performance than the sensational media accounts that sometimes dominate headlines and the academic debate.


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