Favoritism in Repeated Procurement Auction PRELIMINARY (original) (raw)

Favoritism in Repeated Procurement Auction

2004

In this paper, we investigate the interaction between two firms engaged in a repeated procurement relationship modelled as a multiple criteria auction, and a procurement official (agent) whose duty is to decide on a scoring rule.

Fine-Tailored for the Cartel-Favoritism in Procurement

Review of Industrial Organization, 2009

In this paper, we investigate the interaction between two firms, which are involved in a repeated procurement relationship modeled as a multiple criteria auction, and an auctioneer (a government employee) who has discretion in devising the selection criteria. Our main result is that favoritism substantially facilitates collusion. It increases the gains from collusion and contributes to solving basic implementation problems for a cartel of bidders operating in a stochastically changing environment. A most simple allocation rule where firms take turns in winning, independently of stochastic social preferences and firms' costs, achieves full cartel efficiency (including price, production and design efficiency). In each period the selection criteria is fine-tailored to the in-turn winner: the "environment" adapts to the cartel. This result holds true when the expected punishment is a fixed cost. When the cost varies with the magnitude of the distortion of the selection criteria (compared to the true social preferences), favoritism only partially shelters the cartel from the environment. We thus find that favoritism generally facilitates collusion at a high cost for society. Our analysis suggests some anti-corruption measures that could be effective in curbing favoritism and collusion in public markets. It also suggests that the much-advocated rotation of officials is likely to be counter-productive.

Corruption and competition in procurement auctions

We investigate the effect of corruption on competition in procurement. Our assumption is that the bureaucrat (i.e., the agent that administers the market), if corrupt, may provide an opportunity for bid readjusments in exchange for a bribe. As firms expect to be paying a bribe, a mechanical effect of corruption is to increase the contract price by an amount corresponding to the anticipated bribe. We show, however, that a key effect of corruption is to facilitate collusion in price between firms and thereby to generate a price increase that goes far beyond the bribe received by the bureaucrat. We discuss the effect of other forms of bureaucratic discretion in the procurement process and analyze conditions under which unilateral anticorruption controls restore price competition. We would like to thank Philippe Jehiel, Paul Milgrom, and Jean Tirole for helpful discussions. We are grateful to the referee and the Editor for very helpful comments. 1 The fight against corruption has become a top priority for international institutions like the World Bank, the IMF, and the WTO. Copyright © 2005, RAND. 1 mss # Compte et al.; art. # 01; RAND Journal of Economics vol. 36(1) 2 / THE RAND JOURNAL OF ECONOMICS 2 One exception is Burguet and Che , which we will discuss shortly. 3 Most theoretical studies of corruption have focused on the issue of collusion and optimal delegation in principalsupervisor-agent models of regulation (see . For a model of government procurement and international trade (with no corruption) using an auction theory framework, see also . 4 Our aim is to investigate the effect of corruption on existing public auction procedures and the consequent impact on government procurement. In particular, we will not attempt to derive optimal "collusion-proof" or "corruption-proof" mechanisms. Also note that we investigate the effect of corruption on competition. This is in contrast with who investigate the effect of competitiveness of the environment on the level of corruption. 5 The key role played by imperfections in bribe competition will be explained at length in Section 3. 6 Note that while our modelling of imperfect competition will facilitate exposition, our results do not hinge on that particular modelling: our results also hold under more standard models of imperfect competition (see Section 3).

Corruption in Multidimensional Procurement Auctions Under Asymmetry

2019

We examine corruption in first-and second-score procurement auctions in an asymmetric bidder setting. We assume that the auction is delegated to an agent who possesses more information about quality than the procurer and is known to be corrupt with some probability. Using this information asymmetry, the corrupt agent asks for a bribe from one of two bidders and promises to manipulate bids in return. We show that the agent approaches the weaker firm for higher levels of bidder asymmetry in both the auction formats. Using a symmetric quasi-linear scoring rule we show that neither the first-nor the second-score auction implements the optimal mechanism, with or without corruption. Our numerical simulations suggest that the buyer prefers the first-score auction when the stronger firm is approached by the agent in the second-score auction. If the weaker firm is favored on the other hand, the buyer switches to the second-score auction when the probability of corruption is high. Finally, our paper highlights the limited manipulation power of the agent in the second-score auction.

Equilibrium competition, social welfare and corruption in procurement auctions

Social Choice and Welfare, 2019

We study the effects of corruption on equilibrium competition and social welfare in a public procurement auction. A government pays costs to invite firms to the auction, and a bureaucrat who runs the auction may request a bribe from the winning firm. We first show that, with no corruption, the bureaucrat will invite more than the socially optimal number of firms to the auction. Second, the effects of corruption on equilibrium outcomes vary across different forms of bribery. For a fixed bribe, corruption does not affect equilibrium competition, yet it does induce social welfare loss. For a proportional bribe, the bureaucrat may invite either fewer or more firms, depending on how much he weights his private interest relative to the government payoff. Finally, we show that information disclosure may consistently induce more firms to be invited, regardless of whether there is corruption.

Collusive market-sharing and corruption in procurement

RePEc: Research Papers in Economics, 2005

This paper investigates links between corruption and collusion in procurement. A …rst-price multiple-object auction is administered by an agent who has legal discretion to allow for a readjustment of (all) submitted o¤ers before the o¢ cial opening. The agent may be corrupt, i.e. willing to "sell" his decision in exchange for a bribe. Our main result shows that the corrupt agent's incentives to extract rents are closely linked with that of a cartel of bidders. First, collusive bidding conveys value to the agent's decision power. Second, self-interested abuse of discretion to extract rents (corruption) provides a mechanism to enforce collusion. A second result is that package bidding can facilitate collusion. We also …nd that with corruption, collusion is more likely in auctions where …rms are small relative to the market. Our main message to auction designers, competition authorities and criminal courts is that risks of collusion and of corruption must be addressed simultaneously. Some other policy implications for the design of tender procedures are discussed.

Competitive Procurement with Corruption

The RAND Journal of Economics, 2004

We study competitive procurement administered by a corrupt agent who is willing to manipulate his evaluation of contract proposals in exchange for bribes. With complete information and no corruption, the efficient firm will win the contract for sure. If the agent is corrupt and has large manipulation power, however, bribery makes it costly for the efficient firm to secure a sure win, so in equilibrium the efficient firm loses the contract with positive probability. The optimal scoring rule for the buyer deemphasizes quality relative to price and does not fully handicap, and may even favor, the efficient firm.

Corruption in delegated public procurement auctions

European Journal of Political Economy, 2014

In this paper we theoretically analyse effects of corruption in public procurements within a scoring-auction framework. A corrupt politician, who acts on behalf of the public sector, receives a kickback from the winning bidder. The politician selects the scoring rule. The paper shows that such corruption always leads to lower quality and lower price. Given a level of corruption, a higher bargaining power of the politician in extracting bribes does not affect the quality but leads to higher price.

Renegotiation and Discrimination in Symmetric Procurement Auctions

In order to make competition open, fair and transparent, procurement regulations often require equal treatment for all bidders. This paper shows how a favorite supplier can be treated preferentially (opening the door to home bias and corruption) even when explicit discrimination is not allowed. We analyze a procurement setting in which the optimal design of the project to be contracted is unknown. The sponsor has to invest in specifying the project. The larger the investment, the higher the probability that the initial design is optimal. When it is not, a bargaining process between the winning firm and the sponsor takes place. Profits from bargaining are larger for the favorite supplier than for its rivals. Given this comparative advantage, the favored firm bids more aggressively and then, it wins more often than standard firms. Finally, we show that the sponsor invests less in specifying the initial design, when favoritism is stronger. Underinvestment in design specification is a t...