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Renegotiation, discrimination and favoritism in symmetric procurement auctions

Author

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  • Arozamena, Leandro
  • Ganuza, Juan-José
  • Weinschelbaum, Federico

Abstract

In order to make competition open, fair and transparent, procurement regulations often require equal treatment for all bidders. This paper shows how a favored supplier can be treated preferentially (opening the door to home bias and corruption) even when explicit discrimination is not allowed. We analyze a procurement setting in which the optimal design of the project to be contracted is unknown. The sponsor has to invest in specifying the project. The larger the investment, the higher the probability that the initial design is optimal. When it is not, a bargaining process between the winning firm and the sponsor takes place. Profits from bargaining are larger for the favored supplier than for its rivals. Given this comparative advantage, the favored firm bids more aggressively and wins more often than standard firms. Finally, we show that the sponsor invests less in specifying the initial design, when favoritism is stronger. Underinvestment in design specification is a tool for providing a comparative advantage to the favored firm.

Suggested Citation

  • Arozamena, Leandro & Ganuza, Juan-José & Weinschelbaum, Federico, 2023. "Renegotiation, discrimination and favoritism in symmetric procurement auctions," European Economic Review, Elsevier, vol. 159(C).
    • Handle: RePEc:eee:eecrev:v:159:y:2023:i:c:s0014292123001940
    DOI: 10.1016/j.euroecorev.2023.104566
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    References listed on IDEAS

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    8. Mulabdic, Alen & Rotunno, Lorenzo, 2022. "Trade barriers in government procurement," European Economic Review, Elsevier, vol. 148(C).
    9. Roberto Burguet & Juan-José Ganuza & José G Montalvo, 2018. "The microeconomics of corruption," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume II, chapter 16, pages 420-450, Edward Elgar Publishing.
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    Cited by:

    1. Josephine Auer & Lana Friesen & Ian A. MacKenzie, 2026. "A Secret Worth Keeping? Bid Cap Design in Budget-Constrained Procurement Auctions," Discussion Papers Series 672, School of Economics, University of Queensland, Australia.
    2. Arozamena, Leandro & Ganuza, Juan-José & Weinschelbaum, Federico, 2025. "Corruption and renegotiation in procurement," Economics Letters, Elsevier, vol. 255(C).

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    Keywords

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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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