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Equilibrium competition, social welfare and corruption in procurement auctions

Author

Listed:
  • Minbo Xu

    (Beijing Normal University)

  • Daniel Z. Li

    (Durham University Business School)

Abstract

We study the effects of corruption on equilibrium competition and social welfare in a public procurement auction. A government pays costs to invite firms to the auction, and a bureaucrat who runs the auction may request a bribe from the winning firm. We first show that, with no corruption, the bureaucrat will invite more than the socially optimal number of firms to the auction. Second, the effects of corruption on equilibrium outcomes vary across different forms of bribery. For a fixed bribe, corruption does not affect equilibrium competition, yet it does induce social welfare loss. For a proportional bribe, the bureaucrat may invite either fewer or more firms, depending on how much he weights his private interest relative to the government payoff. Finally, we show that information disclosure may consistently induce more firms to be invited, regardless of whether there is corruption.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:sochwe:v:53:y:2019:i:3:d:10.1007_s00355-019-01192-8
    DOI: 10.1007/s00355-019-01192-8
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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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