Procurement Auctions under Quality Manipulation Corruption

2021-05-24 Publications

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In most procurement, the projects (objects) can be delivered at variable quality levels measured by multiple non- monetary attributes; therefore, it is indispensable to define and assess quality. However, the buyer does not usually possess the specific industrial expertise necessary for quality evaluation. Therefore, a procurement auction usually involves an agent (he) who intermediates between the buyer (she) and the supplying firm(s) (it/they). Because the agent has some discretionary power in quality evaluation, he may use this power to seek a bribe from a corrupt firm. The problem of quality manipulation arises when the agent distorts reports of quality scores of bids. In particular, the agent can exaggerate the corrupt firm’s quality score and make it more likely to win the contract.

If an inefficient firm is favored by the agent, the buyer can adjust the procurement mechanism such that the corruption rent of the inefficient firm erodes the technological rent of the efficient firm; however, doing so may require procuring the project at an undesirable quality level. To resolve this trade-off between corruption deterrence and quality distortion, unlike standard results in the literature, the buyer may overstate her preference for quality, and the dominance of scoring auctions over minimum-quality auctions disappears.

Author
Yangguang Huang
Assistant Professor, Department of Economics
Faculty Associate, Division of Public Policy
Yangguang (Sunny) Huang is an Assistant Professor of Economics at the Hong Kong University of…
Jijun Xia
Shanghai University of Finance and Economics
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