In 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 Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. 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.
Publisher Info
Paper 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: Handle: RePEc:cfr:cefirw:w0074
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 Email: Web page: http://www.cefir.ru More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: (Julia Babich) The email address of this maintainer does not seem to be valid anymore. Please ask Julia Babich to update the entry or send us the correct address..
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
This paper has been announced in the following NEP Reports:
References listed on IDEAS 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.:
Susan Athey & Kyle Bagwell & Chris Sanchirico, 1998.
"Collusion and Price Rigidity,"
Working papers
98-23, Massachusetts Institute of Technology (MIT), Department of Economics.
Other versions:
McAfee, R Preston & McMillan, John, 1992.
"Bidding Rings,"
American Economic Review,
American Economic Association, vol. 82(3), pages 579-99, June.
[Downloadable!] (restricted)
Other versions:
McAfee, R. Preston & McMillan, John., 1990.
"Bidding Rings,"
Working Papers
726, California Institute of Technology, Division of the Humanities and Social Sciences.
[Downloadable!]