Equilibrium competition, social welfare and corruption in procurement auctions

Li, Daniel; Xu, Minbo

Equilibrium competition, social welfare and corruption in procurement auctions

Li, Daniel; Xu, Minbo

Authors

Daniel Li daniel.li@durham.ac.uk
Associate Professor

Minbo Xu

Abstract

We study the e¤ects of corruption on equilibrium competition and social welfare in a public procurement auction. In our model, rms are invited to the auction at positive costs, and a bureaucrat who runs the auction on behalf of a government may request a bribe from the winning rm. We rst present the over-invitation re- sults in the absence of corruption, in which more than a socially optimal number of rms will be invited. Second, we show that the e¤ects of corruption on equilibrium outcomes vary across di¤erent forms of bribery. For a xed bribe, corruption has no e¤ect on equilibrium competition, although it does induce social welfare loss. For a proportional bribe, a corrupt bureaucrat may invite fewer or more rms to the auction depending on how much he weights his personal interest relative to the government payo¤. Thus, corruption may result in either Pareto-improving or dete- riorating allocations. Finally, we show that information disclosure may consistently induce more rms to be invited, regardless of whether there is corruption.

Citation

Li, D., & Xu, M. (2017). Equilibrium competition, social welfare and corruption in procurement auctions

Publication Date	Jan 1, 2017
Deposit Date	May 31, 2019
Publicly Available Date	May 31, 2019
Series Title	Durham University Business School working papers series
Public URL	https://durham-repository.worktribe.com/output/1168677
Publisher URL	https://www.dur.ac.uk/business/research/economics/working-papers/