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Corruption and competition in procurement

We consider a procurement problem in which the procurement agent is supposed to allocate the realization of a project according to a competitive mechanism that values bids in terms of the proposed price and quality. Potential bidders have private information about their production costs. Since the procurement agent is also in charge of verifying delivered quality, in exchange for a bribe, he can allow an arbitrary firm to be awarded the realization of the project and to produce a quality level lower than the announced. We compute the equilibrium level of corruption and we study the impact on corruption of the competitiveness of the environment, and in particular of: i) an increase in the number of potential suppliers of the good or service to be procured, ii) competitive (rather than collusive) behavior of procurement agents, and iii) an increase of competition in the market for procurement agents. We identify the effects that influence the equilibrium level of corruption and show that, contrary to conventional wisdom, corruption may well be increasing in competition.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 464.

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Date of creation: Mar 2000
Date of revision: Mar 2001
Handle: RePEc:upf:upfgen:464
Contact details of provider: Web page: http://www.econ.upf.edu/

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  1. R. Preston McAfee & John McMillan, 1987. "Competition for Agency Contracts," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 296-307, Summer.
  2. Marco Celentani & Juan J. Ganuza, 2001. "Organized vs. competitive corruption," Economics Working Papers 526, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2001.
  3. Jean-Jaques Laffont & Jean Tirole, 1985. "Auctioning Incentive Contracts," Working papers 403, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Beck, Paul J. & Maher, Michael W., 1986. "A comparison of bribery and bidding in thin markets," Economics Letters, Elsevier, vol. 20(1), pages 1-5.
  5. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Auction design and favoritism," International Journal of Industrial Organization, Elsevier, vol. 9(1), pages 9-42, March.
  6. Banfield, Edward C, 1975. "Corruption as a Feature of Governmental Organization," Journal of Law and Economics, University of Chicago Press, vol. 18(3), pages 587-605, December.
  7. Rafael Di Tella & Alberto Ades, 1999. "Rents, Competition, and Corruption," American Economic Review, American Economic Association, vol. 89(4), pages 982-993, September.
  8. Lien, Da-Hsiang Donald, 1987. "Asymmetric information in competitive bribery games," Economics Letters, Elsevier, vol. 23(2), pages 153-156.
  9. Ades, Alberto & Di Tella, Rafael, 1997. "National Champions and Corruption: Some Unpleasant Interventionist Arithmetic," Economic Journal, Royal Economic Society, vol. 107(443), pages 1023-42, July.
  10. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-87, June.
  11. Shang-Jin Wei, 2000. "Natural Openness and Good Government," NBER Working Papers 7765, National Bureau of Economic Research, Inc.
  12. Laffont, Jean-Jacques & N'Guessan, Tchetche, 1999. "Competition and corruption in an agency relationship," Journal of Development Economics, Elsevier, vol. 60(2), pages 271-295, December.
  13. Yeon-Koo Che, 1993. "Design Competition through Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 668-680, Winter.
  14. Bliss, Christopher & Di Tella, Rafael, 1997. "Does Competition Kill Corruption?," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1001-23, October.
  15. Lien, Da-Hsiang Donald, 1986. "A note on competitive bribery games," Economics Letters, Elsevier, vol. 22(4), pages 337-341.
  16. Marco Celentani & Juan J. Ganuza, 1999. "Corruption and the Hadleyburg effect," Economics Working Papers 382, Department of Economics and Business, Universitat Pompeu Fabra.
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