Competition in Procurement Auctions with Corruption

Abstract

We study the effects of corruption on equilibrium competition and social welfare in a first-price public procurement auction. In our model, firms are invited into the auction at positive costs, and a bureaucrat runs the auction on behalf of a government, who may request a bribe from the winning firm afterward. We first show that, in the absence of corruption, the bureaucrat will invite more than socially optimal number of firms into the auction. Secondly, the effects of corruption on equilibrium competition and social welfare vary across different forms of bribery. In the case of fixed bribe, corruption has no effect on equilibrium competition, yet does induce social welfare loss due to the distortion cost of increased public spending. In the case of proportional bribe, the bureaucrat may invite fewer or more firms into the auction, depending on how much the bureaucrat weights on his personal interest. Thirdly, we show that information disclosure may result in more dispersed distribution of firms' cost estimates, and induce more firms to be invited, no matter there is corruption or not. Finally, we also provide some discussions on the policy implications of our model.