Corruption and Competition in Procurement

Abstract

We consider a procurement problem in which the procurement agent is supposed to allocate the realization of a project according to a competitive mechanism that values bids in terms of the proposed price and quality. Potential bidders have private information about their production costs. Since the procurement agent is also in charge of verifying delivered quality, in exchange for a bribe, he can allow an arbitrary firm to be awarded the realization of the project and to produce a quality level lower than the announced. We compute equilibrium corruption and we study the impact on corruption of the competitiveness of the environment, and in particular of: i) an increase in the number of potential suppliers of the good or service to be procured, and ii) an increase of competition in the market for procurement agents. We identify the effects that influence equilibrium corruption and show that, contrary to conventional wisdom, corruption may well be increasing in competition.

Keywords: corruption, competition, public procurement

JEL Classification: C72, D73, H57, K42