The Impact of Centralization, Corruption and Institutional Quality on Procurement Prices: An Application to Pharmaceutical Purchasing in Italy

This paper deals with the open issue about the choice between a centralized versus a decentralized public procurement strategy. Using a unique dataset on tender prices of selected drugs for hospital usage awarded by a sample of 52 Italian local health service providers (ASLs) between 2009 and 2012, we test which procurement system (centralized, decentralized or hybrid) performs better. Controlling for several covariates, we always find that centralized and hybrid procurers pay lower prices as compared to decentralized units. Moreover, our results show that in areas in which corruption is higher or, more generally, institutional quality is lower, the effect of centralization in negotiating lower prices is much stronger, with savings that can reach also 50 percent of the price paid by ASLs that procure on their own.