"Bid Manipulation in Open Procurement Auctions"

Public procurement is a complex process that presents numerous opportunities for corruption. I examine how an auctioneer can abuse the bid evaluation process in an open electronic auction to collude with a bidder for personal gain. I formulate a new theoretical model for low-bid auctions with a corruption agreement between an auctioneer and a bidder. A dishonest auctioneer disqualifies a favored bidder's rivals during bid evaluation and erases information on competing bids from auction reports. I estimate the model using a novel dataset on public procurements that took place in Russia in 2014 to evaluate welfare loss and corruption rents. The estimates show that an auction model with corruption at the evaluation stage provides a 54–99% better fit than a standard English auction model in 20 studied markets with suspected bid manipulation. The average rent of a corrupt firm ranges from 1.3% to 41% of an award price. The procurer's loss due to corruption can be as high as 14% of procurement costs. The proposed auction model can be used in other conditions where similar incentives for bid manipulation exist.