Abstract
We study the effects of corruption on equilibrium competition and social welfare in a public procurement auction. A government pays costs to invite firms to the auction, and a bureaucrat who runs the auction may request a bribe from the winning firm. We first show that, with no corruption, the bureaucrat will invite more than the socially optimal number of firms to the auction. Second, the effects of corruption on equilibrium outcomes vary across different forms of bribery. For a fixed bribe, corruption does not affect equilibrium competition, yet it does induce social welfare loss. For a proportional bribe, the bureaucrat may invite either fewer or more firms, depending on how much he weights his private interest relative to the government payoff. Finally, we show that information disclosure may consistently induce more firms to be invited, regardless of whether there is corruption.
Highlights
Public procurements account for a substantial part of economies worldwide
Our main result is that the effects of corruption on equilibrium competition and social welfare vary across different forms of bribery
The above results show that the effects of corruption on equilibrium competition and social welfare vary across different forms of bribery
Summary
Public procurements account for a substantial part of economies worldwide. In the European Union (EU), more than 250,000 public authorities spend approximately 14% of GDP on the purchase of services and supplies each year. Naturally, corruption is a common concern in public procurements. We provide a theoretical investigation of the effects of corruption on equilibrium competition and social welfare in a public procurement auction. We investigate the effects of various forms of bribery on the number of invited firms and social welfare in procurement auctions. Other related papers include Burguet and Perry (2009) and Arozamena and Weinschelbaum (2009) Another strand of literature studies corruption in multidimensional procurement auctions, whereby the government may care about both the price and quality of the project. The key differences in our model are twofold: first, we consider a public procurement auction with a broader definition of social welfare, which takes Szech (2011) as a special case; second, the focus of our paper is on the effects of corruption on equilibrium bidding strategy, competition and social welfare in a public procurement auction.
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