Reducing government spending with privatization competitions: A study of the Department of Defense experience

In a privatization competition, private contractors bid against an in-house team to perform a governmental function that is currently performed by the in-house team. The Department of Defense initiated 3,500 privatization com petitions from 1978 to 1994, generating estimated annual savings of $1.46 b illion. We estimate a reduced-form model of the savings from these competit ions that takes into account the premature cancellation of some competition s and the censoring of the in-house bid at current cost. The Department of Defense maintains a list of candidates for future privatization competition s. Using our model, we forecast annual savings of $5.74 billion if privatiz ation competitions were completed for ail functions on this list.