The Effect of Corruption on Bidding Behavior in First-Price Auctions

We compare the equilibria that result from sequential and simultaneous moves when two firms compete à la Bertrand in a homogeneous-good market and firms' unit costs are private information. Alternatively, our setup can be interpreted as a procurement auction with endogenous quantity where the buyer uses a first-price format if moves are simultaneous and she awards one bidder a right of first refusal if moves are sequential. We show that the first mover can be more or less aggressive in the sequential game than it would be in a simultaneous game. In addition, in the case of sequential choices there is a second-mover advantage. Finally, we prove that, under some conditions, buyer and total surplus are larger when moves are simultaneous.Keywords: oligopoly, auctions with endogenous quantity; right of first refusal; secondmover advantage.JEL classification: C72, D43, D44 * Universidad Torcuato Di Tella.

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“…As mentioned in the previous 4 Logconcavity of the c.d.f. function holds for most well-known distributions.…”

Section: The Modelmentioning

confidence: 65%

Simultaneous vs. sequential price competition with incomplete information

Arozamena

Weinschelbaum

2009

Economics Letters

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“…These papers include Arozamena and Weinschelbaum (2004), Porter and Shoham (2005), and Bikhchandani, Lippman, and Ryan (2005), Choi (2003) and Lee (2004). Applied to a procurement auction, these papers examine the implications of the right of first refusal granted to one supplier by a buyer (or auctioneer) on the bidding behavior of the other suppliers and the resulting price paid by the buyer.…”

Section: Related Literaturementioning

confidence: 99%

“…Applied to a procurement auction, these papers examine the implications of the right of first refusal granted to one supplier by a buyer (or auctioneer) on the bidding behavior of the other suppliers and the resulting price paid by the buyer. 4 The papers by Arozamena and Weinschelbaum (2004) and Porter and Shoham (2005) introduce an auctioneer who grants the right of first refusal instead of the buyer. However neither paper has an explicit model of the bribery payments to the auctioneer.…”

Section: Related Literaturementioning

confidence: 99%

“…For this symmetric case, Arozamena and Weinschelbaum (2004) and Porter and Shoham (2004) have shown that convexity (or concavity) of the inverse hazard rate of the cost distribution is the condition that would determine whether one or more honest suppliers would bid more (or less) aggressively against a remaining supplier who had a right of first refusal at the 13 This factor will be greater than unity whenever the margin between bid and cost of the HS, b h (c) − c, is decreasing in c. For example, this will be true when g d (c) is non-decreasing in c. It will also be true for the family of cost distributions defined in Section 6. lowest bid of the honest suppliers. 14 In our asymmetric case in which the HS and DS have different cost distributions, this condition is not sufficient to determine the bidding behavior of the HS.…”

Section: Equilibrium Conditions For the Bidding Functionsmentioning

confidence: 99%

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Bribery and Favoritism by Auctioneers in Sealed-Bid Auctions

Burguet

Perry

2007

The B.E. Journal of Theoretical Economics

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We consider a model of bribery in an asymmetric procurement auction. In return for a bribe from the dishonest supplier, the auctioneer has the discretion to allow this supplier to revise his bid downward to match the low bid of the honest supplier. The dishonest supplier can also win the contract outright without paying a bribe by bidding below the honest supplier. We investigate the effect of the bribe share and the cost distributions on the bidding functions, the allocative distortion, and the expected price paid by the buyer. The dishonest supplier bids more aggressively to win the contract outright when the auctioneer takes a larger bribe share. Bribery and the implied right of first refusal introduce a new allocative distortion in favor of the dishonest supplier. Finally, we use the power family of cost distributions to examine the expected price paid by the buyer. When the dishonest supplier has a more favorable cost distribution, there exist bribe shares sufficiently large such that the expected price paid by the buyer can actually decline as a result of bribery.

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“…Particularly when the supervisor is not the principal, she might not spend sufficient efforts to obtain the information about purchased good"s quality and price, thus creating room for misbehavior by employees. The procurement staff then can collude with selling firm to exploit this information rent, contracting to pay a higher than necessary price, with a side-payment made from the selling firm to the buying agent (Laffont and Tirole 1991;Arozamena and Weinschelbaum 2009). …”

Section: Introductionmentioning

confidence: 99%

Bribes for Sales: Evidence from the Second Set of Books

Cole¹,

Tran

2011

SSRN Journal

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We study a proprietary dataset detailing the terms of over 1,000 sales transactions to 218 firms by a mechanics importer in an Asian country. Kickbacks are commons: 85 firms demand cash kickbacks in order to make a purchase. We find government firms to be the most corrupt, requiring kickbacks 47% of the time. However, private domestic firms are not free of corruption, with 32% requiring kickbacks. Perhaps most surprisingly, foreign firms, which offer higher salaries and have more educated employees, are more corrupt than domestic private firms: 40% of them take kickback. Japanese firms stand out as particularly corrupt. From the selling firm"s perspective, transactions with higher kickbacks also have higher prices and higher markups. These findings suggest specific implications for corporate governance in emerging markets, where corruption is often widespread.

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The Effect of Corruption on Bidding Behavior in First-Price Auctions

Cited by 23 publications

References 19 publications

Simultaneous vs. sequential price competition with incomplete information

Simultaneous vs. sequential price competition with incomplete information

Bribery and Favoritism by Auctioneers in Sealed-Bid Auctions

Bribes for Sales: Evidence from the Second Set of Books

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