Equilibrium competition, social welfare and corruption in procurement auctions.

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.