Corruption in Public Procurement Auctions: Positive Equilibrium Analysis, Incentive Mechanism Design, and Empirical Study

57 Pages Posted: 4 Nov 2008 Last revised: 16 Jul 2009

See all articles by Maria Monica Wihardja

Maria Monica Wihardja

Centre of Strategic and International Studies

Date Written: February 23, 2009

Abstract

We provide a positive analysis of the equilibrium bidding and bribing strategies with and without corruption in a first-price, sealed-bid, procurement auction with two-dimensional-type bidders. With corruption, we assume that the quality of the bidders are unobservable and non-contractible ex-post. We show examples of equilibrium bids and bribes of N two-dimensional-type bidders in an incomplete information game where the type space is discrete and strategy space is infinite. The equilibrium bid and bribe decrease in the number of bidders. Moreover, we show that in this auction with corruption, quality is randomly chosen, constraining efficiency. In fact, no mechanism can be efficient in this auction. The empirical study suggests that increasing the number of bidders increases the percentage cost efficiency at a decreasing rate and it starts to decrease the percentage cost efficiency after it reaches a certain number of bidders.

Keywords: Auction, Procurement, Corruption

JEL Classification: D44, H57, D73

Suggested Citation

Wihardja, Maria Monica, Corruption in Public Procurement Auctions: Positive Equilibrium Analysis, Incentive Mechanism Design, and Empirical Study (February 23, 2009). Available at SSRN: https://ssrn.com/abstract=1294088 or http://dx.doi.org/10.2139/ssrn.1294088

Maria Monica Wihardja (Contact Author)

Centre of Strategic and International Studies ( email )

The Jakarta Post Building, 3-4th Floor
Jl. Palmerah Barat 142-143
Jakarta, 10270
Indonesia

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