Title: Competition in Procurement Auctions with Corruption
Abstract: We study the effects of corruption on equilibrium competition and social welfare in a public procurement auction. A bureaucrat runs the auction on behalf of a government. He invites firms into the auction at positive costs, and may request a bribe from the winning firm afterward. We first show that, under standard assumptions, in the absence of corruption, the bureaucrat invites more firms than social optimum number that maximizes social welfare. Secondly, the effects of corruption on competition and social welfare vary across different forms of bribery. In the case of fixed bribe, corruption has no effect on equilibrium competition, yet does induce social welfare loss due to the distortion cost of increased public spending. In the case of proportional bribe, the corrupt bureaucrat will invite less firms into the auction, which may result in Pareto-improving allocation in equilibrium. Finally, we also show that information disclosure may consistently induce more firms to be invited, no matter there is corruption or not.
About Minbo Xu: He is an assistant professor in Business School at Beijing Normal University. He obtained his PhD degree in Economics at Georgetown University. He specialized in industrial organization (auction, etc.), and applied microeconomics.
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