A political economy analysis of preferential public procurement policies

In this paper, we analyze the role of political forces in the formation of protectionist policy in the award of procurement contract. Firstly, we consider the optimal policy designed by a utilitarian government maximizing the expected sum of the consumers' surplus and of the domestic firm's rent. Then, we characterize the awarding rule that would be optimal for a shareholders' majority and for a nonshareholders' majority and we compare the welfare effects of each rule. We show that the preferential treatment of the domestic firm increases when the proportion of shareholders having the majority decreases and that the domestic firm may have a greater expected profit when the awarding rule is left to the discretion of politicians for some high values of procurement contracts for the consumers.