Equilibrium Competition, Social Welfare and Corruption in Procurement Auctions

We study the effects of corruption on equilibrium competition and social welfare in a public procurement auction. In our model, firms 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 Örm. We Örst present the over-invitation results in the absence of corruption, in which more than a socially optimal number of firms will be invited. Second, we show that the e§ects of corruption on equilibrium outcomes vary across di§erent forms of bribery. For a Öxed 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 firms to the auction depending on how much he weights his personal interest relative to the government payoff. Thus, corruption may result in either Pareto-improving or deteriorating allocations. Finally, we show that information disclosure may consistently induce more firms to be invited, regardless of whether there is corruption.