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Bid Rigging – An Analysis of Corruption in Auctions

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  • Yvan Lengwiler
  • Elmar G. Wolfstetter

Abstract

In many auctions, the auctioneer is an agent of the seller. This invites corruption. We propose a model of corruption in which the auctioneer orchestrates bid rigging by inviting a bidder to either lower or raise his bid, whichever is more profitable. We characterize equilibrium bidding in first- and second-price auctions, show how corruption distorts the allocation, and why both the auctioneer and bidders may have a vested interest in maintaining corruption. Bid rigging is initiated by the auctioneer after bids have been submitted in order to minimize illegal contact and to realize the maximum gain from corruption.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1488.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1488

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Keywords: auctions; procurement; corruption; right of first refusal; numerical methods;

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  1. McAfee, R Preston & McMillan, John, 1992. "Bidding Rings," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 579-99, June.
  2. Arozamena, Leandro & Weinschelbaum, Federico, 2009. "The effect of corruption on bidding behavior in first-price auctions," European Economic Review, Elsevier, Elsevier, vol. 53(6), pages 645-657, August.
  3. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Auction design and favoritism," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 9(1), pages 9-42, March.
  4. Benny Moldovanu & Manfred Tietzel, 1998. "Goethe's Second-Price Auction," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(4), pages 854-859, August.
  5. Marco Celentani & Juan J. Ganuza, 2000. "Corruption and competition in procurement," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 464, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2001.
  6. Burguet Roberto & Perry Martin K, 2007. "Bribery and Favoritism by Auctioneers in Sealed-Bid Auctions," The B.E. Journal of Theoretical Economics, De Gruyter, De Gruyter, vol. 7(1), pages 1-27, June.
  7. Paulo Klinger Monteiro & Flavio Menezes, 2001. "Corruption and auctions," Microeconomics, EconWPA 0105002, EconWPA.
  8. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Riley, John G, 1989. "Expected Revenue from Open and Sealed Bid Auctions," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 3(3), pages 41-50, Summer.
  10. Engelbrecht-Wiggans Richard, 1994. "Auctions with Price-Proportional Benefits to Bidders," Games and Economic Behavior, Elsevier, Elsevier, vol. 6(3), pages 339-346, May.
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Cited by:
  1. Martín Gonzalez-Eiras & Dirk Niepelt, 2005. "Sustaining Social Security," CESifo Working Paper Series 1494, CESifo Group Munich.
  2. Maria M. Wihardja, 2010. "Corruption In Public Procurement Auctions: Positive Equilibrium Analysis, Incentive Mechanism Design, And Empirical Study," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, Chung-Ang Unviersity, Department of Economics, vol. 35(1), pages 35-57, March.
  3. Wolfstetter, Elmar G., 2005. "Procurement of Goods and Services – Scope and Government," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University 93, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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