What does consolidation mean for performance? Concentration, competition, and defense contracting outcomes

Abstract

How does industrial concentration influence performance outcomes in government contracting? This paper hypothesizes that concentration influences contract performance directly, as well as indirectly through reducing competition for contract awards. Tests of these hypotheses on a large dataset of US defense contracts reveal nuanced results. Increasing concentration is directly associated with a higher likelihood of contract terminations, and remains the same even after accounting for levels of competition (suggesting competition does not mediate the influence of concentration on this performance indicator). Contrary to expectations, higher competition is associated with a higher rather than a lower likelihood of terminations. Concentration is not associated with the incidence of cost ceiling breaches, and competition resulting in single (rather than multiple) offers is associated with a lower likelihood of a breach. When a breach has occurred, however, higher concentration is associated with larger breaches sizes, and higher competition with smaller breach sizes. Combined, these results partially support concerns about a connection between concentration, market power, and diminished performance incentives but suggest that the nature of these relationships depends upon the indicator of contract performance being considered.