Businesses' Transaction Costs when Contracting with Governments: The impact of product complexity and public contract management experience

When governments buy products and services, the purchase price reflects not just the seller’s production costs, but also the costs of making the exchange occur. How much selling businesses spend and for which activities has important implications for the management activities governments need to execute to increase the likelihood of a successful exchange. This article develops a framework for analyzing businesses’ transaction cost spending across varying circumstances of selling products to governments. Using unique data from two original surveys of private businesses in Denmark, we provide a rare portrait of how much sellers spend across several categories of contract management activities. Consistent with extant research, we show that these expenditures are lower when selling products with less risky attributes. We also find lower expenditures when businesses have contracted with governments in the past, a finding that suggests that experience can lower the risks of a failed transaction. These results suggest that governments need to calibrate their purchasing activities not only to the circumstances of the exchange, but also to the businesses’ own transaction cost spending.