Auditing and Competitive Bidding in the Public Sector

Abstract. This paper investigates the impact of a ministry’s budget size on the choice between audit-ing a (Niskanen) bureau and employing competitive bidding in the provision of a publicly funded good. The ministry’s marginal expected payoff increases fastest with budget size for auctioning as opposed to auditing. However, the ministry is shown to switch from a purely public provision to a competitive pro-vision as the budget size increases even if expected fixed costs favor the audit. The study contributes to the literature by extending the Niskanen framework and by endogenizing the institutional arrangements for the provision of public sector goods