IDEAS home Printed from https://ideas.repec.org/a/eee/matsoc/v123y2023icp10-24.html
   My bibliography  Save this article

Favouritism and corruption in procurement auctions

Author

Listed:
  • Dastidar, Krishnendu Ghosh
  • Jain, Sonakshi

Abstract

This paper analyses the impact of favouritism and corruption in procurement auctions in an emerging economy. In our model there are two firms: One is the favoured one, while the other is not. The firm that wins the contract needs to supply a good that meets a certain quality standard, failing which its payment would be withheld. There is corruption in the system: If the measured quality falls short of the minimum stipulated level, the winner can pay a bribe to inflate the reported quality. The same amount of bribe inflates the reported quality of the favoured firm by a higher magnitude as compared to the firm which is not in favour. It is shown that favouritism induces inefficient outcomes, reduces competition and leads to lower expected equilibrium quality. The favoured firm also earns a higher payoff. The welfare effects of favouritism are ambiguous and we illustrate our results with an example.

Suggested Citation

  • Dastidar, Krishnendu Ghosh & Jain, Sonakshi, 2023. "Favouritism and corruption in procurement auctions," Mathematical Social Sciences, Elsevier, vol. 123(C), pages 10-24.
    • Handle: RePEc:eee:matsoc:v:123:y:2023:i:c:p:10-24
    DOI: 10.1016/j.mathsocsci.2023.02.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165489623000161
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.mathsocsci.2023.02.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. 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.
    2. Quoc-Anh Do & Kieu-Trang Nguyen & Anh N. Tran, 2017. "One Mandarin Benefits the Whole Clan: Hometown Favoritism in an Authoritarian Regime," American Economic Journal: Applied Economics, American Economic Association, vol. 9(4), pages 1-29, October.
    3. Arozamena, Leandro & Weinschelbaum, Federico, 2009. "The effect of corruption on bidding behavior in first-price auctions," European Economic Review, Elsevier, vol. 53(6), pages 645-657, August.
    4. Roberto Burguet & Yeon-Koo Che, 2004. "Competitive Procurement with Corruption," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 50-68, Spring.
    5. Jiancai Pi, 2021. "An investigation of seeming favoritism in public procurement," Manchester School, University of Manchester, vol. 89(1), pages 128-137, January.
    6. Roberto Burguet, 2017. "Procurement Design with Corruption," American Economic Journal: Microeconomics, American Economic Association, vol. 9(2), pages 315-341, May.
    7. Krishnendu Ghosh Dastidar, 2017. "Oligopoly, Auctions and Market Quality," Economics, Law, and Institutions in Asia Pacific, Springer, number 978-4-431-55396-0, June.
    8. Dastidar, Krishnendu Ghosh & Mukherjee, Diganta, 2014. "Corruption in delegated public procurement auctions," European Journal of Political Economy, Elsevier, vol. 35(C), pages 122-127.
    9. Elena Krasnokutskaya & Katja Seim, 2011. "Bid Preference Programs and Participation in Highway Procurement Auctions," American Economic Review, American Economic Association, vol. 101(6), pages 2653-2686, October.
    10. Michael A. Stoll & Steven Raphael & Harry J. Holzer, 2004. "Black Job Applicants and the Hiring Officer's Race," ILR Review, Cornell University, ILR School, vol. 57(2), pages 267-287, January.
    11. Lengwiler, Yvan & Wolfstetter, Elmar G., 2006. "Corruption in Procurement Auctions," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 90, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    12. Andrew Schotter & Allan Corns, 1999. "Can Affirmative Action Be Cost Effective? An Experimental Examination of Price-Preference Auctions," American Economic Review, American Economic Association, vol. 89(1), pages 291-305, March.
    13. Ella Segev & Aner Sela, 2014. "Sequential all-pay auctions with head starts," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 43(4), pages 893-923, December.
    14. Jian Chu & Raymond Fisman & Songtao Tan & Yongxiang Wang, 2021. "Hometown Ties and the Quality of Government Monitoring: Evidence from Rotation of Chinese Auditors," American Economic Journal: Applied Economics, American Economic Association, vol. 13(3), pages 176-201, July.
    15. Kirkegaard, René, 2012. "Favoritism in asymmetric contests: Head starts and handicaps," Games and Economic Behavior, Elsevier, vol. 76(1), pages 226-248.
    16. Krishnendu Ghosh Dastidar & Makoto Yano, 2021. "Corruption, market quality, and entry deterrence in emerging economies," International Journal of Economic Theory, The International Society for Economic Theory, vol. 17(1), pages 101-117, March.
    17. Lengwiler, Yvan & Wolfstetter, Elmar, 2010. "Auctions and corruption: An analysis of bid rigging by a corrupt auctioneer," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 1872-1892, October.
    18. repec:hal:spmain:info:hdl:2441/sj22pruud8a7b8cdlvom4sbtp is not listed on IDEAS
    19. Celentani, Marco & Ganuza, Juan-Jose, 2002. "Corruption and competition in procurement," European Economic Review, Elsevier, vol. 46(7), pages 1273-1303, July.
    20. Kirkegaard, René, 2013. "Handicaps in incomplete information all-pay auctions with a diverse set of bidders," European Economic Review, Elsevier, vol. 64(C), pages 98-110.
    21. , & ,, 2006. "Revenue comparisons for auctions when bidders have arbitrary types," Theoretical Economics, Econometric Society, vol. 1(1), pages 95-118, March.
    22. Sarbajit Chaudhuri & Krishnendu Ghosh Dastidar & Sushobhan Mahata, 2022. "Cronyism and corruption in India: A game theoretic analysis," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 2607-2618, September.
    23. Mara Faccio, 2006. "Politically Connected Firms," American Economic Review, American Economic Association, vol. 96(1), pages 369-386, March.
    24. Krishnendu Ghosh DASTIDAR & YANO Makoto, 2020. "FCPA and Market Quality in Emerging Economies," Discussion papers 20087, Research Institute of Economy, Trade and Industry (RIETI).
    25. Minchuk, Yizhaq & Sela, Aner, 2018. "Prebidding first-price auctions with and without head starts," Mathematical Social Sciences, Elsevier, vol. 91(C), pages 51-55.
    26. Andrew Dickens, 2018. "Ethnolinguistic Favoritism in African Politics," American Economic Journal: Applied Economics, American Economic Association, vol. 10(3), pages 370-402, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Anna Balsevich & Elena Podkolzina, 2014. "Indicators Of Corruption In Public Procurement: The Example Of Russian Regions," HSE Working papers WP BRP 76/EC/2014, National Research University Higher School of Economics.
    2. Gauthier, Bernard & Goyette, Jonathan & Kouamé, Wilfried A.K., 2021. "Why do firms pay bribes? Evidence on the demand and supply sides of corruption in developing countries," Journal of Economic Behavior & Organization, Elsevier, vol. 190(C), pages 463-479.
    3. Helene Mass & Nicolas Fugger & Vitali Gretschko & Achim Wambach, 2020. "Imitation Perfection—A Simple Rule to Prevent Discrimination in Procurement," American Economic Journal: Microeconomics, American Economic Association, vol. 12(3), pages 189-245, August.
    4. Minbo Xu & Daniel Z. Li, 2019. "Equilibrium competition, social welfare and corruption in procurement auctions," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 53(3), pages 443-465, October.
    5. Huang, He & Li, Zhipeng, 2015. "Procurement auctions with ex-ante endogenous bribery," Economic Modelling, Elsevier, vol. 47(C), pages 111-117.
    6. Subhasish M. Chowdhury & Patricia Esteve‐González & Anwesha Mukherjee, 2023. "Heterogeneity, leveling the playing field, and affirmative action in contests," Southern Economic Journal, John Wiley & Sons, vol. 89(3), pages 924-974, January.
    7. Zhe Chen, 2021. "The bid orchestration and competitions in scoring procurement auctions," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1718-1729, October.
    8. Roberto Burguet, 2017. "Procurement Design with Corruption," American Economic Journal: Microeconomics, American Economic Association, vol. 9(2), pages 315-341, May.
    9. Wang, Hong, 2020. "Quality manipulation and limit corruption in competitive procurement," European Journal of Operational Research, Elsevier, vol. 283(3), pages 1124-1135.
    10. Roberto Burguet & Juan-José Ganuza & José García-Montalvo, 2016. "The Microeconomics of Corruption. A Review of Thirty Years of Research," Working Papers 908, Barcelona School of Economics.
    11. Huang, Yangguang & Xia, Jijun, 2019. "Procurement auctions under quality manipulation corruption," European Economic Review, Elsevier, vol. 111(C), pages 380-399.
    12. Yuanzhu Lu & Xundong Yin & Hu Zhang, 2023. "Does surround‐bidding corruption hurt procurers?," Manchester School, University of Manchester, vol. 91(4), pages 320-335, July.
    13. Huang, Yangguang, 2019. "An empirical study of scoring auctions and quality manipulation corruption," European Economic Review, Elsevier, vol. 120(C).
    14. Franke, Jörg & Leininger, Wolfgang & Wasser, Cédric, 2018. "Optimal favoritism in all-pay auctions and lottery contests," European Economic Review, Elsevier, vol. 104(C), pages 22-37.
    15. Peng Hao & Jun-Peng Guo & Eoghan O’Neill & Yong-Heng Shi, 2023. "When Will First-Price Work Well? The Impact of Anti-Corruption Rules on Photovoltaic Power Generation Procurement Auctions," Sustainability, MDPI, vol. 15(4), pages 1-24, February.
    16. Arozamena, Leandro & Weinschelbaum, Federico, 2009. "The effect of corruption on bidding behavior in first-price auctions," European Economic Review, Elsevier, vol. 53(6), pages 645-657, August.
    17. Nicolas Campos & Eduardo Engel & Ronald D. Fischer & Alexander Galetovic, 2019. "Renegotiations and corruption in infrastructure: The Odebrecht case," "Marco Fanno" Working Papers 0230, Dipartimento di Scienze Economiche "Marco Fanno".
    18. Sümeyra Atmaca, 2020. "Application Period in Reverse Auctions," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 20/993, Ghent University, Faculty of Economics and Business Administration.
    19. Vitali Gretschko & Achim Wambach, 2012. "Auctions vs. Negotiations: The Case of Favoritism," CESifo Working Paper Series 4045, CESifo.
    20. Minchuk, Yizhaq & Sela, Aner, 2018. "Prebidding first-price auctions with and without head starts," Mathematical Social Sciences, Elsevier, vol. 91(C), pages 51-55.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:matsoc:v:123:y:2023:i:c:p:10-24. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505565 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.