Corruption in Public Procurement Market

Abstract

The paper presents a model of public procurement in which the contracting officer is corrupt and extracts bribes from the bidding firms. The firms submit multidimensional bids, which consist of the quality and the price of the project that they propose to realize. The firms differ in their costs of realizing the project at a given quality, and these costs are private information. The contracting official, in exchange for a bribe, abuses the power of his or her public office by distorting the quality ranking of the bids and by giving the favoured firm an opportunity to readjust its bid to undercut its rivals. Our analysis suggests that when the firms serve only the internal market, the public project is realized at low quality and inflated prices. However, when the firms are also allowed to sell the product they develop for the internal market in a foreign market, the auction is ex post efficient.