Centralized vs. decentralized procurement: Does dispersed information call for decentralized decision-making?

Should the government procure equipment for its agencies or let them run their own procurement auctions? Suppose the agency has private information about product quality, but is inclined to favour local suppliers. Decentralization saves bureaucracy and "agency costs" (costs tied to truthful revelation of quality information), but leads to biased decisions (a discriminatory auction). I show that the costs associated with discrimination may increase when the quality differences (or the probability that the agency knows the quality) increase. Moreover, this effect may be dominant, implying that increased importance of local information may be an argument for centralization. (C) 2000 Elsevier Science B.V. All rights reserved.