Tuesday, March 28, 2017

Corruption vs. collusion (bid rigging) in Govt. Procurement.

The United States has rigid procurement rules, designed to prevent the government bureaucrats who oversee procurement from steering government contracts to well-connected patrons.  To a large extent they succeed, at least when compared to other countries.

However, the rules also prevent procurement officers from responding to collusion by, for example, raising reserve prices, or by promising one of the bidders a big share of the future procurement if she offers a better price.  

This trade-off is examined theoretically, in a recent paper by some middling economists entitled Horizontal Mergers in Optimal Auctions, where procurement agents have the flexibility to design auction rules in response to the threat of collusion:
Merger [or collusion] effects are ... much smaller than in open auctions because bidders compete more against an optimal mechanism than they do against each other. As a consequence, there is less competition for mergers [or collusion] to eliminate.

This implies that collusion would have much smaller effects, if the auctioneer had the ability to react to collusion, e.g., with a higher reserve.  But giving the auctioneer this ability could also lead to patronage (corruption).


  1. This comment has been removed by the author.

  2. Unfortunately, bid rigging is a subject that's all too well known in my home city of Albany, New York. Early in 2017 many well-known businessmen and officials tied to Governor Cuomo were charged with bid rigging in a massive "pay-to-play scheme" centering on the "Buffalo Billion" project. Link to article in Buffalo News is below.
    Bid rigging goes against the concept of bargaining laid out in chapter 16 of the Managerial Economics textbook, where the author models bargaining out as a ""game of chicken" where the ability to commit to a position gives one player bargaining power over rivals." Bid rigging goes against this concept because those who appear to be rivals, the person granting the bid and one of the companies competing to get the bid, are in fact not rivals but are working together.
    In the case of the Buffalo Billion project, bid rigging occurred because company officials were given inside information on the nature of the bids so they would in fact win out. Also, decision makers doling out the contracts were bribed. When this conduct happens, effective bargaining is compromised and, in this case, it ends of costing taxpayers extra money for civil projects to be completed.
    Also, consider the nonstrategic view of bargaining, which states that "if you can decrease your own gain to reaching an agreement by improving your outside option, you become a tougher bargainer because you have less to gain by reaching agreement." (Froeb, et al, 2016). The nature of bid rigging means that the person or entity granting the bid has no desire to improve the feasibility of outside options because they plan to grant the bid to their preferred partner. Once again, we can see how bid rigging goes against the concepts of effective bargaining.


    Froeb, L., McCann, B., Shor, M., Ward, M. (2016). Managerial Economics: A Problem Solving Approach. Cengage Learning: Boston, MA.