Discretionary Procurement Flexibilization, Efficiency, and Rent-Seeking: Evidence from Chile During COVID-19

This paper examines the effects of increased bureaucratic discretion in public procurement during the COVID-19 pandemic, when the Chilean government relaxed restrictions on direct deals and expanded discretionary authority for small contracts. While greater discretion can lower administrative costs and accelerate purchasing, it may also create opportunities for rent-seeking and inefficiency. Using contract-level procurement data from 2019 to 2021, we study how these regulatory changes affected purchasing outcomes. We find that discretion substantially reduced processing times and improved reporting quality. However, it also increased unit prices in larger contracts, whereas prices for smaller contracts remained stable. We further document significant bunching just below the threshold for non-competitive direct deals, consistent with strategic contract sizing and rent-seeking. Using these estimates, we show that savings from small contracts were outweighed by higher costs in larger ones, resulting in a net fiscal loss of approximately USD 99 million. Overall, discretion appears beneficial for low-value purchases but generates inefficiencies as contract size increases.