Joint Procurements in Building National Defence: Why Are There So Few?

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Title: Joint Procurements in Building National Defence: Why Are There So Few?
Author: Kanniainen, Vesa; Lehtonen, Juha-Matti
Publisher: HECER, Helsinki Center of Economic Research
Date: 2018-03
Language: en
Belongs to series: HECER, Discussion Paper No. 427
ISSN: 1795-0562
Abstract: Economic benefits of joint procurement arise from increased bargaining power relative to the contractor and from economies of scale in production. There is, however, a puzzle: why are such procurements so few? This paper introduces a bargaining model with forward-looking expectations about the scale of delivery contracts. It is shown that the price sensitivity of the scale of acquisition is favourable for the buying partnership as it tends to depress the bargaining price. Several explanations are proposed for why it is hard to align the buyers’ incentives. First, the preferences concerning the properties of the products are country- specific with divergent implications for national security. Second, a country with a low valuation of the product has more bargaining power than a country with a high valuation and may expect a side payment from the partner of the procurement, while the latter may not have sufficient incentives to pay. Third, the gains from cooperative procurement in terms of economies of scale for the producer may not be sufficient to compensate for the conflicting preferences among the contractors. Fourth, while the future unpredictability of technologies or the future risks of deteriorating national security might support longer-term joint procurements, short-term opportunism tends to prevent long-term commitments.
Subject: joint procurement
defence material
national security

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