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Fine-Tailored for the Cartel-Favoritism in Procurement

  • Ariane Lambert-Mogiliansky

    ()

  • Grigory Kosenok

    ()

In this paper, we investigate the interaction between two firms, which are involved in a repeated procurement relationship modeled as a multiple criteria auction, and an auctioneer (a government employee) who has discretion in devising the selection criteria. Our main result is that favoritism substantially facilitates collusion. It increases the gains from collusion and contributes to solving basic implementation problems for a cartel of bidders operating in a stochastically changing environment. A most simple allocation rule where firms take turns in winning, independently of stochastic social preferences and firms' costs, achieves full cartel efficiency (including price, production, and design efficiency). In each period the selection criteria is fine-tailored to the in-turn winner: the "environment" adapts to the cartel. This result holds true when the expected punishment is a fixed cost. When the cost varies with the magnitude of the distortion of the selection criteria (compared to the true social preferences), favoritism only partially shelters the cartel from the environment. We thus find that favoritism generally facilitates collusion at a high cost for society. Our analysis suggests some anti-corruption measures that could be effective in curbing favoritism and collusion in public markets. It also suggests that the much-advocated rotation of officials is likely to be counter-productive.

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File URL: http://hdl.handle.net/10.1007/s11151-009-9220-5
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Article provided by Springer in its journal Review of Industrial Organization.

Volume (Year): 35 (2009)
Issue (Month): 1 (September)
Pages: 95-121

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Handle: RePEc:kap:revind:v:35:y:2009:i:1:p:95-121
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  1. Susan Athey & Kyle Bagwell, 1999. "Optimal Collusion with Private Information," Working papers 99-17, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Kyle Bagwell, 2004. "Collusion and Price Rigidity," Theory workshop papers 658612000000000081, UCLA Department of Economics.
  3. repec:cup:cbooks:9780521632935 is not listed on IDEAS
  4. repec:cup:cbooks:9780521659123 is not listed on IDEAS
  5. Fudenberg, D. & Levine, D.K. & Maskin, E., 1989. "The Folk Theorem With Inperfect Public Information," Working papers 523, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Ariane Lambert-Mogiliansky & Konstantin Sonin, 2006. "Collusive market sharing and corruption in procurement," Post-Print halshs-00754175, HAL.
  7. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Auction design and favoritism," International Journal of Industrial Organization, Elsevier, vol. 9(1), pages 9-42, March.
  8. Lambert-Mogiliansky, Ariane, 2002. "Why firms pay occasional bribes: the connection economy," European Journal of Political Economy, Elsevier, vol. 18(1), pages 47-60, March.
  9. Michihiro Kandori, 1992. "Social Norms and Community Enforcement," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 63-80.
  10. Green, Edward J. & Porter, Robert H., 1982. "Noncooperative Collusion Under Imperfect Price Information," Working Papers 367, California Institute of Technology, Division of the Humanities and Social Sciences.
  11. Ariane Lambert-Mogiliansky & Konstantin Sonin, 2003. "Corruption and Collusion in Procurement Tenders," Working Papers w0036, Center for Economic and Financial Research (CEFIR).
  12. Roy Radner & Roger Myerson & Eric Maskin, 1986. "An Example of a Repeated Partnership Game with Discounting and with Uniformly Inefficient Equilibria," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 59-69.
  13. Riley, John G, 1989. "Expected Revenue from Open and Sealed Bid Auctions," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 41-50, Summer.
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