Procurement with Manipulation

Decio Coviello (HEC Montreal)
Andrea Gugliemo (Wayfair)
Clarissa Lotti (Tor Vergata)
Giancarlo Spagnolo (SITE,EIEF, Tor Vergata)

Abstract : The aim of this paper is to document whether and how buyers use discretion in public procurement. To do so we use detailed data on Italian procurement. Our evidence is that manipulation of procurement terms to avoid legal requirements of free competition mostly happens in central authorities (Ministries or national road authority), who are frequent buyers and run procurement with discretion more frequently. We implement a bunching estimator and we find that the manipulation of the terms of the contracts is associated to more discretion, less competition but with no extra procurement costs measured by rebates and ex-post renegotiations. This evidence is compatible with the idea that (large and repeated) buyers might rely on discretion to keep contractors accountable. Manipulation of the terms of the contract, in contrast, is less likely in local municipalities. Using detailed data on municipal procurement we find that municipalities are less frequent buyers and manipulate procurement less frequently running systematically more competitive procurement, which comes at no extra procurement costs. To establish causality, we run a regression discontinuity analysis and find that females mayors quasi-experimentally elected in closely contested electoral races do not manipulate procurement, use less discretion at no extra procurement costs. Our overall evidence suggests that while discretion in procurement reduces competition it can be beneficial in contexts with repeated interactions between buyers and sellers.

The Value of Relational Collusive Arrangements in the Colombian Electricity Market

Miguel Espinosa (Universitat Pompeu Fabra)
Rocco Macchiavello (London School of Economics)
Carlos Sanchez (Universitat Barcelona)

Abstract : Informal inter-firm relationships are beneficial for participating firms but can be detrimental to market efficiency, e.g., in the case of informal collusion. By their nature, it is empirically challenging to identify collusive agreements sustained by informal relationships. This paper exploits a regulatory reform in the Colombia energy market to detect the presence of a collusive agreement among (some of) the electricity generating firms. To isolate informal collusion from confounders we exploit the lag between the announcement and the implementation of a transparency reform that would make it harder for firms to collude. Under informal collusion, the announcement of the reform destroys the future value of the informal agreement and thus leads to its instantaneous collapse – before the reform is implemented. Additional analysis identify the firms in the cartel and show that the announcement of the reform decreased by 43% the bid submitted by cartel members. A simple calibration of the incentive compatibility constraints suggests that the value of the collusive agreement was substantial for most of the participating firms.

Collusion Via Information Sharing

Olga Gorelkina (University of Liverpool)

Abstract : This paper studies collusion via certified sharing of information in the context of mechanism design with transfers. The model of collusion builds on Aumann’s (1976) description of knowledge. A cartel can agree to collude on a contract if it is common knowledge within the cartel that the contract is incentive compatible and individually rational. Robustness of mechanisms to collusion via information sharing is defined as the impossibility of an agreement to collude. Robust mechanisms are characterized in a number of settings where a varying number of agents is liable to the cartel. Finally, I consider an application where a novel collusion-robust auction mechanism achieves the second-best revenue.