Favoritism in Public Procurement Auctions: Model of Endogenous Entry
Abstract: Governments of different countries try to lower the entry cost in public procurement in order to decrease pubic spending. The purpose of this paper is to examine how the entry cost influences procurement prices in the corrupt environment. We adapt the model of selective entry and find that lower entry cost always reduces the contract price paid by the non-corrupt procurer, but at the same time may make favoritism more stable. Thus the entry cost may not affect the contract price paid by the corrupt procurer or even increase it by making corrupt deals more profitable. We illustrate this result using case study on gasoline procurement in Russia where the entry cost of companies was decreased by e-procurement reform. This allows us to examine how changes in entry costs influence competition of companies and procurement prices in auctions.