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
Date Written: February 23, 2009
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: Suggested Citation