Corruption and Collusion in Procurement Tenders

There is a mounting body of evidence that collusive agreements between bidders in large multiple-object procurement tenders are often supported by a corrupt administrator. In a first-price multiple-object auction, if the auctioneer has some legal discretion to allow bidders to readjust their offers prior to the official opening, he also has incentives to extract bribes from agents in exchange for abusing this discretion. In particular, corrupt agent’s incentives to receive bribes are closely linked with that of creating a ’bidding ring’ as the agent’s discretionary power gains value when firms collude. Thus, corruption generates focal equilibria where bidders fully refrain from competing with each other. Additional flexibility of the auction format such as the possibility to submit package bids, which is often considered to be efficiency-enhancing in theoretical literature, increases the risk of collusion in the presence of corruption. Such problems are more likely to arise in tenders, where participating firms are not too close competitors.