Bribery and Allocation Efficiency: Evidence From Public Procurement Auctions in Korea

Abstract

A well-known scandal involving a public enterprise in Korea suggests that supplier firms use entertainment expenses to maintain corrupt ties with officials of purchasing agencies. Such corrupt ties may allow supplier firms to bid low in procurement auctions in anticipation of corrupt officials allowing low-cost goods and services to be supplied. Examining entertainment expenses and bidding data of firms participating in Korea Online E-Procurement System (KONEPS) auctions, we document the prevalence of the entertain-more-and-bid-low behavior, which suggests that a significant part of entertainment expenses are indeed bribes paid to public officials. We further show that the Antigraft Act of 2016, which limits entertaining public officials, had the intended effect of reducing corruption in public procurement. Finally, constructing a measure of firm-level bribe amounts from the response to the new law, we show that bribes are unlikely to enhance allocation efficiency contrary to the prediction of the grease-the-wheels hypothesis.