Cooperative Procurement in Building National Defence: Why Are There So Few?

Abstract

The economic benefits of cooperative procurement derive from, at minimum, increased bargaining power relative to contractors and from economies of scale in production. There is, however, a puzzle: why is this kind of procurement so rare? This paper introduces a bargaining model with forward-looking expectations about the scale of procurement. It is shown that the price sensitivity of the scale of acquisition is favourable for the buying partnership, as it tends to push down the bargaining price. We propose several explanations for why it is hard to align buyers’ incentives: First, preferences for the properties of the products are country-specific, with divergent implications for national security. Second, countries that place a low value on the product have more bargaining power than those that value it highly, and may require a side payment in order to enter a partnership, while the partner may not have sufficient incentives to make such a payment. Third, the gains from cooperative procurement for the producer may not be sufficient to compensate for conflicting preferences among contractors. Fourth, while the future unpredictability of technologies or the future risks of deteriorating national security might support longer-term cooperative procurement, short-term opportunism tends to prevent long-term commitments.