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Corruption and renegotiation in procurement

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A sponsor –e.g. a government agency– uses a procurement auction to select a supplier who will be in charge of the execution of a contract. That contract is incomplete: it may be renegotiated once the auction's winner has been chosen. We examine a setting where one firm may bribe the agent in charge of monitoring contract execution so that the former is treated preferentially if renegotiation actually occurs. If a bribe is accepted, the corrupt firm will be more aggressive at the initial auction and thus win with a larger probability. We show that the equilibrium probability of corruption is larger when the initial contract is less complete, when the corrupt firm's cost is more likely to be similar to her rivals', and when it faces fewer competitors.

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  • Leandro Arozamena & Juan José Ganuza & Federico Weinschelbaum, 2025. "Corruption and renegotiation in procurement," Economics Working Papers 1906, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:1906
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    1. Juan‐José Ganuza, 2007. "Competition And Cost Overruns In Procurement," Journal of Industrial Economics, Wiley Blackwell, vol. 55(4), pages 633-660, December.
    2. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
    3. Erica Bosio & Simeon Djankov & Edward Glaeser & Andrei Shleifer, 2022. "Public Procurement in Law and Practice," American Economic Review, American Economic Association, vol. 112(4), pages 1091-1117, April.
    4. Bliss, Christopher & Di Tella, Rafael, 1997. "Does Competition Kill Corruption?," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1001-1023, October.
    5. Patrick Bajari & Stephanie Houghton & Steven Tadelis, 2014. "Bidding for Incomplete Contracts: An Empirical Analysis of Adaptation Costs," American Economic Review, American Economic Association, vol. 104(4), pages 1288-1319, April.
    6. Nicolás Campos & Eduardo Engel & Ronald D. Fischer & Alexander Galetovic, 2021. "The Ways of Corruption in Infrastructure: Lessons from the Odebrecht Case," Journal of Economic Perspectives, American Economic Association, vol. 35(2), pages 171-190, Spring.
    7. Marco Celentani & Juan-José Ganuza, 2002. "Organized vs. Competitive Corruption," Annals of Operations Research, Springer, vol. 109(1), pages 293-315, January.
    8. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Auction design and favoritism," International Journal of Industrial Organization, Elsevier, vol. 9(1), pages 9-42, March.
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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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