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Renegotiations and corruption in infrastructure: The Odebrecht case

Author

Listed:
  • Nicolas Campos

    (Espacio Público)

  • Eduardo Engel

    (Department of Economics, University of Chile)

  • Ronald D. Fischer

    (Department of Industrial Engineering, University of Chile)

  • Alexander Galetovic

    (Universidad de los Andes (Santiago) and Hoover Institution and Research Associate, CRIEP)

Abstract

In 2016, Brazilian construction firm Odebrecht was fined $2.6 billion by the US Department of Justice (DOJ). According to the plea agreement, between 2001 and 2016 Odebrecht paid $788 million in bribes in 10 Latin American and two African countries in more than 100 large projects. The DOJ estimated that bribe payments increased Odebrecht’s profits by $2.4 billion. Judicial documents and press reports on the Odebrecht case reveal detailed information on the workings of corruption in the infrastructure sector. Based on these sources we establish five facts. First, for projects where Odebrecht paid bribes, renegotiations amounted to 71.3 percent of initial investment estimates, compared with 6.5 percent for projects where Odebrecht paid no bribes. Second, Odebrecht’s bribes were of the order of one percent of a project’s final investment. Third, the profits Odebrecht obtained from bribes as well as its overall profits were small, somewhere between 1 and 4 percent of its sales. Fourth, the creation of the Division of Structured Operations (DSO) by Odebrecht in 2006 led to major reductions in the firm’s costs of paying bribes and recipients’ costs of hiding the illegal proceeds. Fifth, following the creation of the DSO, Odebrecht’s sales increased more than three-fold while its profits remained small. We build a model where firms compete for a project, anticipating a bilateral renegotiation at which their bargaining power is larger if they pay a bribe. Conditional on paying a bribe and cost dispersion among firms being small, firms’ profits are small in equilibrium. When one firm unilaterally innovates by reducing the cost of paying bribes, its market share increases substantially while profits, which are proportional both to the cost advantage and to the magnitude of bribes, remain small. A parametrization with the DOJ’s data suggests that Odebrecht enjoyed a substantial cost advantage in bribing, of the order of 70 percent.

Suggested Citation

  • Nicolas Campos & Eduardo Engel & Ronald D. Fischer & Alexander Galetovic, 2019. "Renegotiations and corruption in infrastructure: The Odebrecht case," "Marco Fanno" Working Papers 0230, Dipartimento di Scienze Economiche "Marco Fanno".
  • Handle: RePEc:pad:wpaper:0230
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    Cited by:

    1. Gallego, Jorge & Rivero, Gonzalo & Martínez, Juan, 2021. "Preventing rather than punishing: An early warning model of malfeasance in public procurement," International Journal of Forecasting, Elsevier, vol. 37(1), pages 360-377.
    2. Eduardo Engel & Ronald D. Fischer & Alexander Galetovic, 2020. "When and How to Use Public-Private Partnerships in Infrastructure: Lessons from the International Experience," NBER Chapters, in: Economic Analysis and Infrastructure Investment, National Bureau of Economic Research, Inc.
    3. Cesar Martinelli, 2020. "Accountability and Grand Corruption," Working Papers 1077, George Mason University, Interdisciplinary Center for Economic Science.

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    More about this item

    Keywords

    Corruption; infrastructure; bribes; auctions; renegotiations; lowballing; fundamental transformation;
    All these keywords.

    JEL classification:

    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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