Market Sharing in Procurement∗

This paper investigates complementarities between corruption and collusion in procurement of large divisible contracts. A first price multiple object auction procedure is administered by an agent who has some legal discretion to allow for a readjustment of (all) submitted offers before the official opening. The agent may be corrupt i.e. willing to ‘sell’ his decision in exchange for a bribe. Our main result shows that the corrupt agent’s incentives to extract rents are closely linked with that of a cartel. Collusive bidding gives value to the agent’s discretionary power. Corruption i.e. abusing discretion to extract rents, in effect provides the cartel with a mechanism to enforce collusion. A second result is that package bidding facilitates collusion. The analysis predicts that collusion is more likely in tenders where firms are small relative to the market. Our main message to auction designers is that risks of collusion and risks of corruption must be addressed simultaneously. Some other policy implications for the design of tender procedures are discussed.