Public Markets Tailored for the Cartel- Favoritism in Procurement Auctions

Ariane Lambert-Mogiliansky and Grigory Kosenok

No w0074, Working Papers from New Economic School (NES)

Abstract: In this paper, we investigate interaction between two firms engaged in a repeated procurement relationship modelled as a multiple criteria auction, and an auctioneer (a government employee) who has discretion in devising the selection criteria. A first result is that, in a one-shot context, favoritism turns the asymmetric information (private cost) procurement auction into a symmetric information auction (in bribes) for a common value prize. In a repeated setting we show that favoritism increases the gains from collusion and contributes to solving basic implementation problems for a cartel of bidders that operates in a stochastically changing environment. A most simple allocation rule where firms take turn in winning independently of stochastic government preferences and firms’ costs is optimal. In each period the selection criteria is fine-tailored to the in-turn winner: the "environment” adapts to the cartel. This result holds true when the expected punishment is a fixed cost. When the cost varies with the magnitude of the distortion of the selection criteria (compared with the true government’s preferences), favoritism only partially shades the cartel from the environment. Nevertheless, even in this case favoritism greatly simplifies matters for the cartel. We thus find that favoritism generally facilitates collusion at a high cost for society. Some policy implications of the analysis are suggested.

Keywords: auction; collusion; favoritism; procurement (search for similar items in EconPapers)
JEL-codes: D44 D73 H57 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2006-05
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https://www.nes.ru/files/Preprints-resh/WP74MogilianskiKosenok.pdf (application/pdf)

Related works:
Working Paper: Public Markets Tailored for the Cartel- Favoritism in Procurement Auctions (2006)
Working Paper: Public markets tailored for the cartel - Favoritism in procurement auctions - (2006)
Working Paper: Public markets tailored for the cartel - Favoritism in procurement auctions - (2006)
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