Reserve Price Underpricing As a Corrupt Strategy

Abstract : We model a sophisticated form of reserve price underpricing in public procurement and provide evidence for the existence of this corrupt equilibrium in Russian public procurement. Setting the reserve price at a relatively low level can prevent the waste of government funds and may discourage inefficient firms from participating. We however show theoretically that, given the right conditions and market structure, reserve price underpricing may also be a corrupt equilibrium that makes the corrupt procurer-seller pair better off. Moreover, this equilibrium can be sustained without side-payments. Our data analysis reveals that this strategy is also applied in Russian public procurement auctions. We indeed find cases of underpricing which are characterized by less competition and an increased likelihood of having only one bidder. Corrupt sellers are also more likely to win auctions and there often, but not always, still is a small rebate, as predicted by the model.

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Judicial Subversion: Evidence from Brazil

Abstract : Is a formally independent judicial system able to check abuses of political power? In this paper we show that candidates in Brazilian local elections who narrowly win an election are 60 percentage points more likely than candidates who narrowly lose to be acquitted in corruption cases filed against them before the election. We show evidence suggesting the effect comes from a direct influence of the power of elected politicians over law enforcers, rather than from elected politicians having better lawyers.

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Playing Whac-a-mole in the Fight Against Corruption: Evidence from Random Audits in Brazil

Abstract : Evidence shows that audits can reduce corruption, but also that corrupt officials are able to substitute to alternate forms of corruption and to adapt over time to the anticorruption system in place—especially when the anticorruption policy imposes controls only on certain types of corruption. This paper studies the possible unintended consequences of such selective anticorruption monitoring, in the context of a large random audits program in Brazil that has proved successful in reducing the misuse of federal funds at the municipal level. By exploiting the random assignment of Brazilian municipalities to the program, we document the existence of unintended (and undesirable) consequences: audited municipalities employ more labor in water provision, and this translates into a more inefficient service, in the sense that providers in audited municipalities use more labor for a given level of output and other inputs. We also provide additional evidence consistent with the idea that local officials may be using their discretion in hiring to substitute between different forms of corruption.

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