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 Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2434

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.