Corruption and Renegotiation in Procurement

• Authors: Leandro Arozamena, Federico Weinschelbaum and Juan-José Ganuza.
• BSE Working Paper: 1492 | May 25
• Keywords: auctions , Procurement , corruption , renegotiation , cost overruns
• JEL codes: C72, D44, D82

A sponsor –e.g. a government agency– uses a procurement auction to select a supplier who will be in charge of the execution of a contract. That contract is incomplete: it may be renegotiated once the auction’s winner has been chosen. We examine a setting where one firm may bribe the agent in charge of monitoring contract execution so that the former is treated preferentially if renegotiation actually occurs. If a bribe is accepted, the corrupt firm will be more aggressive at the initial auction and thus win with a larger probability. We show that the equilibrium probability of corruption is larger when the initial contract is less complete, when the corrupt firm’s cost is more likely to be similar to her rivals’, and when it faces fewer competitors.