Detecting Auctioneer Corruption: Evidence from Russian Procurement Auctions

Abstract : This paper develops a novel method for detecting auctioneer corruption in first-price sealed-bid auctions. We study the leakage of bid information by the auctioneer to a preferred bidder. We construct a formal test for the presence of bid-leakage corruption and apply it to a novel data set of 4.3 million procurement auctions in Russia that occurred between 2011 and 2016. With bid leakage, the preferred bidder gathers information on other bids and waits until the end of the auction to place a bid. Such behavior creates an abnormal correlation between winning and being (chronologically) the last bidder. Informed by this fact, we build several measures of corruption. We document that more than 10% of the auctions were affected by bid leakage. Our results imply that the value of the contracts assigned through these auctions was $1.2 billion over the six-year study period. We build a model of bidding behavior to show that corruption exerts two effects on the expected prices of the contracts. The direct effect inflates the price of the contract. The indirect effect reduces the expected price, since honest bidders are trying to undercut corrupt bidders. We find both effects in the data, with the direct effect being more pronounced.

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Buyer's Experience and Corruption: Evidence from Public Procurement in Russia

Abstract : Can experienced buyers achieve better outcomes? In this paper, we address this question by studying the ability of public organizations to arrange competitive procurement with proper contract execution. We argue that higher experience enables public buyers to set adequate contract terms and requirements, so they can attract ‘good’ suppliers and probability to execute the contract on time increases. We introduce a dynamic measure of relevant experience by estimating for each auction the number of successfully closed contracts of the buyer within the same interval of the reserve prices. Using data on the population of road construction contracts in Russia, concluded by public buyers of federal, regional and municipal level, we show that relevant experience increases the probability to execute contract on time, but it decreases the competition and this effect is stronger for the regions with higher perception of corruption.

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Discretion and Corruption in Public Procurement

Abstract : This paper investigates the determinants and consequences of increasing a buyer's discretion in public procurement. I study the role of discretion in the context of a Hungarian policy reform which removed the obligation of using an open auction for contracts under a certain anticipated value. Below this threshold, buyers can use an alternative "high-discretion" procedure to purchase goods and services. At the threshold, I document large discontinuities in procurement outcomes, but I also find a discontinuity in the density of anticipated contract value, indicating that public agencies set contract values strategically to avoid auctions. I exploit the time variation of the policy reform to estimate the effects of increased discretion and find that discretion increases the price of contracts and decreases the productivity of contractors. I use a structural model to identify discretion's impact on rents from corruption and to simulate the effect of alternative value thresholds. I find that the actual threshold redistributes about 2 percent of the total contract value from taxpayers to firms and decreases the average productivity of contractors by approximately 1.6 percent. My simulations suggest that the optimal threshold would be about a third of the actual.

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Corruption in Procurement: New Facts from Italian Government Contracting

Abstract : We use a confidential database of firms and procurement officials identified by Italian enforcement authorities as corrupt to document the factors associated with the corruption of municipal government contracts. We present four main findings. First, two auction types are more likely to be won by criminal (corrupt) firms: auctions with discretionary criteria (``scoring rule'' rather than first price) and auctions with discretionary procedures showing evidence that these procedures have been abused (negotiated rather than open bidding, with fewer than the formally required number of bidders). Second, discretionary auctions (both criteria and procedure) are chosen more often by corrupt procurement officials, but less often in municipalities in which authorities have identified at least one corrupt procurement official. Third, procurement administrators handle a smaller fraction of auctions in corrupt municipalities. Finally, when an auction is won by a criminal firm, there is a much higher rate of subcontracting to other firms that are themselves corrupt, with much of this effect coming via ex post subcontracts that were undisclosed in the initial bid. We suggest that our findings are most easily reconciled with a model in which more discretion leads to greater efficiency as well as more opportunities for theft, and a central monitor manages this tradeoff by limiting discretion and maintaining high turnover in high-corruption locales.

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