We investigate the effect of corruption on competition in procurement. Our assumption is that the bureaucrat (i.e., the agent that administers the market), if corrupt, may provide an opportunity for bid readjusments in exchange for a bribe. As firms expect to be paying a bribe, a mechanical effect of corruption is to increase the contract price by an amount corresponding to the anticipated bribe. We show, however, that a key effect of corruption is to facilitate collusion in price between firms and thereby to generate a price increase that goes far beyond the bribe received by the bureaucrat. We discuss the effect of other forms of bureaucratic discretion in the procurement process and analyze conditions under which unilateral anticorruption controls restore price competition. Ordering information: This article can be ordered from https://pubs3.rand.org/cgi-bin/rje/pdf.cgi.
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Find related papers by JEL classification: D44 - Microeconomics - - Market Structure and Pricing - - - Auctions D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
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