English, Article, Journal or magazine article edition: Public Markets Tailored for the Cartel - Favoritism in Procurement Auctions - Ariane Lambert Mogiliansky; Grigory Kosenok

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Bookmark: http://trove.nla.gov.au/version/44074
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Public Markets Tailored for the Cartel- Favoritism in Procurement Auctions
Author
  • Ariane Lambert Mogiliansky
  • Grigory Kosenok
Physical Description
  • preprint
Notes
  • In this paper, we investigate interaction between two firms, which are engaged in a repeated procurement relationship modelled as a multiple criteria auction, and an auctioneer (a government employee) who has discretion in devising the selection criteria. A first result is that, in a one-shot context, favoritism turns the asymmetric information (private cost) procurement auction into a symmetric information auction (in bribes) for a common value prize. In a repeated setting we show that favoritism substantially facilitates collusion. It increases the gains from collusion and contributes to solving basic implementation problems for a cartel of bidders that operates in a stochastically changing environment. A most simple allocation rule where firms take turn in winning independently of stochastic government preferences and firms'costs achieves full cartel efficiency including price, production and design efficiency. In each period the selection criteria is fine-tailored to the in-turn winner: the "environment" adapts to the cartel. This result holds true when the expected punishment is a fixed cost. When the cost varies with the magnitude of the distortion of the selection criteria (compared with the true government's preferences), favoritism only partially shades the cartel from the environment. We thus find that favoritism generally facilitates collusion at a high cost for society. Our analysis suggests some anti-corruption measures that can be effective to curb favoritism and collusion in public markets. It also shows that the rotation of officials is not one of them.
  • RePEc:pse:psecon:2006-39
  • In this paper, we investigate interaction between two firms engaged in a repeated procurement relationship modelled as a multiple criteria auction, and an auctioneer (a government employee) who has discretion in devising the selection criteria. A first result is that, in a one-shot context, favoritism turns the asymmetric information (private cost) procurement auction into a symmetric information auction (in bribes) for a common value prize. In a repeated setting we show that favoritism increases the gains from collusion and contributes to solving basic implementation problems for a cartel of bidders that operates in a stochastically changing environment. A most simple allocation rule where firms take turn in winning independently of stochastic government preferences and firms’ costs is optimal. In each period the selection criteria is fine-tailored to the in-turn winner: the "environment” adapts to the cartel. This result holds true when the expected punishment is a fixed cost. When the cost varies with the magnitude of the distortion of the selection criteria (compared with the true government’s preferences), favoritism only partially shades the cartel from the environment. Nevertheless, even in this case favoritism greatly simplifies matters for the cartel. We thus find that favoritism generally facilitates collusion at a high cost for society. Some policy implications of the analysis are suggested.
  • auction, collusion, favoritism, procurement
  • RePEc:cfr:cefirw:w0074
Language
  • English
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