Paying over the odds at the end of the fiscal year. Evidence from Ukraine

Klymak M, Baumann S

Governments are the largest buyers in most countries and they tend to operate budgets that expire at the end of the fiscal year. They also tend to spend disproportionately large amounts right at year-end. This use-it-or-lose-it spending pattern has been observed in a number of countries and is considered a problem due to possible waste. This could be the case if firms increase their prices to profit from a government’s greater demand at the end of the fiscal year. We investigate this previously unexplored possibility using a novel granular dataset of Ukrainian government procurement auctions over the period between 2017 and 2021. First, we document that the prices bid by firms are significantly higher in the last month of a fiscal year. Second, we employ a neural network technique to infer supplier costs from bidding behaviour. We estimate that suppliers charge around a 7.5% higher margin on less competitive tenders at the end of a fiscal year. Third, we demonstrate how results change depending on the type of the procured good, the length of the buyer-supplier relationship, and whether the procurement was expedited as a result of the Covid-19 pandemic. Our findings imply that substantial government funds could be saved if the extent of the year end spending could be moderated.

Keywords:

government spending

,

Ukraine

,

fiscal year distortions

,

procurement