Private interest in public tenders: no revenue, no efficiency and no social benefits

When the goods are to be publicly tendered off and it is the task of the tender officials to determine some specific characteristics of the good, their privileged status allows them to manipulate the results of the tender. In particular, if the officials are interested in getting side-transfers from bidders instead of revenue maximization, they may choose a particular pattern of characteristics to favor some particular bidder. These side transfers (bribes) may potentially become very large, especially when bidders' preferences differ substantially. In Russia and some other transition economies that have experienced a rapid privatization with vast and heterogeneous assets being privatized, this problem is particularly severe. The paper explores — both theoretically and empirically — tender procedures which involve a set of additional conditions to be satisfied by the winner. The aim is to provide a framework for understanding revenue inefficiencies inherent in many auctions and tenders held in Russia during transition.