Kamikazes in Public Procurements: Bid-Rigging and Real Non-Market Outcomes

Abstract

Bid-rigging in public procurements has severe implications for public service quality. We take one ex-post observable bid-rigging strategy to document its effects on Brazil's public services. In a 'kamikaze' strategy in procurement auctions, the lowest bidder withdraws after the auction concludes, allowing the second-lowest bidder to win at higher prices. This pattern occurs in 17 percent of auctions, increasing prices by 18 percent. Shared ownership ties between kamikaze and winning firms suggest coordination of bids. Ultimately, this behavior correlates with negative real non-price outcomes: higher mortality rates in public hospitals and increased road accidents after maintenance contracts. Our findings reveal how bid-rigging extends beyond fiscal costs and endangers public well-being.

Keywords: public procurement, bid-rigging, shared ownership, non-market outcomes, financially-constrained governments

JEL Classification: G34, G38, L22, L41