Public Procurement and Corrupt Reserve Prices

Abstract: This article develops a methodology to identify corrupt couples of public servants and firms in public procurement. In some countries procurers must set a reserve price and make it public. The procurer can manipulate the reserve price in order to conclude the contract with the preferred supplier at a certain contract price. We estimate the reserve price exploiting within procurer variation and then we analyze the residuals for each pair of procurer and seller. In case of competition the identity of the seller should not affect the reserve price because it is determined before the actual implementation of the auction. Using Russian public procurement data of gasoline we are able to report the number of corrupt couples at national and regional level. Furthermore we find that corruption has a significant impact on the contract price but competition is effective in reducing this effect. Electronic auctions with sufficient competition can even offset the effect of corruption and lower procurement costs.