Corruption and Stooges in Procurement

If a buying firm employs an agent to conduct a procurement process, then sellers might be tempted to bribe the agent in order to win the contract. As a consequence, the procurement outcome can be inefficient (i.e., a low-quality product is purchased). This paper shows under which conditions sellers’ delegation to stooges mitigates or aggravates the inefficiency problem. Delegation will be efficiency-enhancing if the stooge’s and the delegating seller’s joint loss from detected corruption is sufficiently large compared with the respective loss of a non-delegating seller. Intuitively, the probability of inefficient procurement increases with the intensity of the bribing competition, and large losses mitigate this intensity. If all parties on the sell side that are involved in corruption suffer similar losses under delegation and nondelegation, then the condition for an efficiency-enhancing effect of stooges is clearly satisfied. The theoretical analysis also shows that, in contrast to the strategic-delegation literature, overall delegation is not an equilibrium outcome because bribing is a hidden action and sellers dislike leaving positive rents to stooges who are protected by limited liability. Finally, this paper derives the buying firm’s optimal reserve price and incentive pay for its agent to prevent an inefficient procurement outcome for sure.