A transaction cost approach for public procurement

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PurposeThis paper aims to develop a theoretical framework based on transaction cost economics that identifies key factors shaping public agencies’ governance of supplier relationships and related performance implications.Design/methodology/approachThe paper presents an extended transaction cost framework for research on public procurement (PP) with a corresponding set of propositions. Transaction cost theory and specific features of and challenges to the PP function identified in extant literature constitute the main elements of the framework.FindingsThis conceptual paper makes three sets of proposals. First, public agencies tend to rely on market governance of supplier relationships and when PP deploys non-market governance, such governance tends to be of a unilateral (vs bilateral) kind. Second, increases in purchasing competence and autonomy of PP and particularly if implemented in tandem, will reduce PP’s overreliance on market governance and increase PP’s use of non-market governance. Third, PP should perform better for less complex transactions – and when contracting complexity relates to safeguarding of specific assets rather than when complexity relates to environmental and behavioral uncertainty. Increases in competence and autonomy should increase PP’s performance, particularly for complex transactions.Practical implicationsPublic agencies may be in a better position to align governance solutions with transaction complexities by developing their procurement competence, decentralizing procurement decisions and increasing the flexibility of national and international procurement regulations. Private companies selling to public agencies need to be aware of and able to adapt to PP practices such as extensive use of market governance and unilateral governance as the primary form of non-market governance.Social implicationsThe paper discusses how public agencies can improve procurement performance through better alignment of governance of supplier relationships with transaction attributes and thereby increase the quality of public services.Originality/valueThe paper relies on a well-established theoretical perspective, enabling identification (and, potentially, correction) of governance misalignment in the public sector.