Public Markets Tailored for the Cartel- Favoritism in Procurement Auctions
AbstractIn this paper, we investigate interaction between two firms engaged in a repeated procurement relationship modelled as a multiple criteria auction, and an auctioneer (a government employee) who has discretion in devising the selection criteria. A first result is that, in a one-shot context, favoritism turns the asymmetric information (private cost) procurement auction into a symmetric information auction (in bribes) for a common value prize. In a repeated setting we show that favoritism increases the gains from collusion and contributes to solving basic implementation problems for a cartel of bidders that operates in a stochastically changing environment. A most simple allocation rule where firms take turn in winning independently of stochastic government preferences and firms’ costs is optimal. In each period the selection criteria is fine-tailored to the in-turn winner: the "environment” adapts to the cartel. This result holds true when the expected punishment is a fixed cost. When the cost varies with the magnitude of the distortion of the selection criteria (compared with the true government’s preferences), favoritism only partially shades the cartel from the environment. Nevertheless, even in this case favoritism greatly simplifies matters for the cartel. We thus find that favoritism generally facilitates collusion at a high cost for society. Some policy implications of the analysis are suggested.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0074.
Length: 37 pages
Date of creation: May 2006
Date of revision:
Contact details of provider:
Postal: 117418 Russia, Moscow, Nakhimovsky pr., 47, office 720
Phone: +7 (495) 105 50 02
Fax: +7 (495) 105 50 03
Web page: http://www.cefir.ru
More information through EDIRC
auction; collusion; favoritism; procurement;
Other versions of this item:
- Ariane Lambert-Mogiliansky & Grigory Kosenok, 2006. "Public markets tailored for the cartel - Favoritism in procurement auctions -," PSE Working Papers halshs-00590288, HAL.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-28 (All new papers)
- NEP-COM-2006-10-28 (Industrial Competition)
- NEP-PBE-2006-10-28 (Public Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- McAfee, R. Preston & McMillan, John., 1990.
Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences
726, California Institute of Technology, Division of the Humanities and Social Sciences.
- McAfee, R Preston & McMillan, John, 1992. "Bidding Rings," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 579-99, June.
- Fudenberg, Drew & Levine, David I & Maskin, Eric, 1994.
"The Folk Theorem with Imperfect Public Information,"
Econometrica, Econometric Society,
Econometric Society, vol. 62(5), pages 997-1039, September.
- Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 2058, David K. Levine.
- Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 394, David K. Levine.
- Fudenberg, D. & Levine, D.K. & Maskin, E., 1989. "The Folk Theorem With Inperfect Public Information," Working papers 523, Massachusetts Institute of Technology (MIT), Department of Economics.
- Ariane Lambert-Mogiliansky & Konstantin Sonin, 2003.
"Corruption and Collusion in Procurement Tenders,"
w0036, Center for Economic and Financial Research (CEFIR).
- Ariane Lambert-Mogiliansky & Konstantin Sonin, 2006. "Collusive Market Sharing and Corruption in Procurement," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 15(4), pages 883-908, December.
- Ariane Lambert-Mogiliansky & Konstantin Sonin, 2005. "Collusive market-sharing and corruption in procurement," PSE Working Papers halshs-00590773, HAL.
- Roberto Burguet & Yeon-Koo Che, 2004. "Competitive Procurement with Corruption," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 50-68, Spring.
- Kyle Bagwell, 2004.
"Collusion and Price Rigidity,"
Theory workshop papers, UCLA Department of Economics
658612000000000081, UCLA Department of Economics.
- Susan Athey & Kyle Bagwell & Chris Sanchirico, 2004. "Collusion and Price Rigidity," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 71(2), pages 317-349, 04.
- Susan Athey & Kyle Bagwell & Chris Sanchirico, 2004. "Collusion and Price Rigidity," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 317-349.
- Susan Athey & Kyle Bagwell & Chris Sanchirico, 1998. "Collusion and Price Rigidity," Working papers 98-23, Massachusetts Institute of Technology (MIT), Department of Economics.
- Susan Athey & Kyle Bagwell & Chris Sanchirico, 2002. "Collusion and price rigidity," Discussion Papers, Columbia University, Department of Economics 0102-38, Columbia University, Department of Economics.
- Bernard Caillaud & Philippe Jehiel, 1998. "Collusion in Auctions with Externalities," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 680-702, Winter.
- O. Compte & A. Lambert-Mogiliansky & T. Verdier, 2005. "Corruption and Competition in Procurement Auctions," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 1-15, Spring.
- Graham, Daniel A & Marshall, Robert C, 1987. "Collusive Bidder Behavior at Single-Object Second-Price and English Auctions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(6), pages 1217-39, December.
- Laffont, Jean-Jacques & Tirole, Jean, 1991. "Auction design and favoritism," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 9(1), pages 9-42, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julia Babich).
If references are entirely missing, you can add them using this form.