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The Effect of Corruption on Bidding Behavior in First-Price Auctions

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Author Info
Federico Weinschelbaum
Leandro Arozamena

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Abstract

Most of the literature on auctions assumes that the auctioneer owns the object on sale. However most auctions are organized and run by an agent of the owner. This separation generates the possibility of corruption. We analyze the effect of a particular form of corruption on bidding behavior in a single-object, private-value auction with risk-neutral bidders. Bidders believe that, with a certain probability, the auctioneer has reached an agreement with one of the bidders by which, after receiving all bids, (i) she will reveal to that bidder all of her rivals' bids, and (ii) she will allow that bidder to change her original bid upwards or downwards. We study how an honest bidder would adjust her bidding behavior when facing this type of collusion between a dishonest rival and the auctioneer. In a first price auction, an honest bidder can become more or less aggressive than she would be without corruption, or her behavior can remain unchanged. We identify sufficient conditions for each of the three possibilities. We also examine the extent to which the most commonly used distributions satisfy each of the three conditions

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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 180.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:180

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Related research
Keywords: auctions corruption

Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions

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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.:
  1. Jones, C. & Menezes, F., 1995. "Auctions and Corruption: How to Compensate the Auctioneer," Papers 291, Australian National University - Department of Economics.
  2. Yvan Lengwiler & Elmar Wolfstetter, 2000. "Auctions and Corruption," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  3. Paulo Klinger Monteiro & Flavio Menezes, 2001. "Corruption and auctions," Microeconomics 0105002, EconWPA. [Downloadable!]
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  4. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
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  5. Kenneth Hendricks & Robert Porter, 1989. "Collusion in Auctions," Discussion Papers 817, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  6. Roberto Burguet & Yeon-Koo Che, 2004. "Competitive Procurement with Corruption," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 50-68, Spring.
  7. Roberto Burguet & Martin Perry, 2000. "Bribery and Favoritism by Auctioneers in Sealed Bid Auctions," Econometric Society World Congress 2000 Contributed Papers 1827, Econometric Society. [Downloadable!]
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  1. Yvan Lengwiler & Elmar G. Wolfstetter, 2005. "Bid Rigging – An Analysis of Corruption in Auctions," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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