Corrupt reserve prices

We develop a methodology to identify favoritism in public procurement auctions with reserve prices and apply it to procurement of gasoline in Russia. As reserve prices are set prior to the auction, they should be independent of the winning seller’s identity in a fair and competitive auction. A procurer-seller pair with consistently higher unit reserve prices than the procurer’s average indicates potentially corrupt favoritism. In auctions involving such favoritist pairs, procurers limit entry, so that their favored sellers face less competition, are more likely to win, and enjoy higher price markups. Electronic open-bid auctions with sufficient competition offset these effects.