To Bribe or Not in a Procurement Auction under Disparate Corruption Pressure

Abstract

We examine a (large) manufacturer's bribery decision (to bribe or not to bribe) arising from a procurement auction under "disparate corruption pressure'' when another (small) manufacturer is known to offer the auctioneer (i.e., the intermediary) a bribe in exchange for the "right of first refusal''. We discover that the large manufacturer should refuse to pay bribes at all times in order to prevent from leaking its private cost information to the small manufacturer and prevent from intensifying the competition. However, even when the large manufacturer is disadvantaged for refusing to bribe, we show that it can benefit from this corrupted auction when the difference in production efficiency or the bribe is high so that the "positive force'' (i.e., cost advantage) derived from the right of first refusal dominates the information disadvantage. Hence, under a specific condition, the large manufacturer has no incentive to expose the collusion between the intermediary and the corrupt manufacturer. Such a "silence tactic'' provides a plausible explanation for the prevalence of corrupt auctions in practice.

Keywords: Procurement Auction, Right of First Refusal, Disparate Corruption Pressure, Collusion