DP2434 Corruption And Competition In Public Market Auctions

Author(s): Olivier Compte , Ariane Lambert-Mogiliansky , Thierry Verdier

Publication Date: April 2000

Keyword(s): Auction Procedures , Collusion , Controls , Corruption

JEL(s): D44 , D73 , K42 , L12

Programme Areas: Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP2434.asp

This paper investigates the effect of corruption on competition in government procurement auctions. Our assumption is that the bureaucrat (i.e. the agent that administers the market), if corrupt, may provide a favour in exchange for a bribe. The favour we consider in most of our analysis is the opportunity to readjust a bid. We show that a key effect of corruption is to facilitate collusion in price between firms. This can result in high public spending and inefficient allocation. We discuss the effect of other forms of bureaucratic discretion in the procurement process and analyse conditions under which unilateral anti-corruption controls may restore price competition.