Corruption in Public Procurement Auctions: Positive Equilibrium Analysis, Incentive Mechanism Design, and Empirical Study

Abstract

We study how poor quality of institution, such as corruption in public procurement auction, could hurt welfare. We show how competition effect could improve the cost-efficiency but not the quality of a public procurement auction with corruption. In fact, no incentive mechanism can be efficient in this auction if qualities are non-contractible. An empirical study suggests that increasing the number of bidders does increase the percentage cost efficiency albeit at a decreasing rate and decreases the percentage cost efficiency after it reaches a certain number of bidders.