Same product, different price: Experimental evidence on the transaction cost expenditures of selling to governments and firms

Abstract

Whether governments pay more than firms when contracting has been an important and stubbornly vexing question in public management. One challenge has been finding ways to credibly compare the costs of engaging in market transactions with governments versus firms. In this paper, we systematically compare the costs of contracting when governments and firms buy the same product under the same circumstances. Using data from a randomized experiment of Danish firms, we examine selling firms' transaction cost expenditures when selling the same product to governments and other firms. We find that firms estimate spending about 34 percent more on transaction cost expenditures when selling to governments than when selling the same product to firms. Experience in selling to governments is associated with lower transaction cost expenditures, suggesting that learning can reduce firms' costs of selling to governments and firms.