Accountability in Complex Procurement Tenders

This paper addresses the issue of favoritism at the design stage of complex procurement auctions. A local community of citizens wants to procure a complex good or project and lacks the ability to translate its preferences into operational technical specifications. This task is delegated to a public officer who may collude with one of the firms at the design stage of the procurement auction in exchange of a bribe. Assuming that it is prohibitively costly to provide a justification for many aspects, we investigate two simple accountability mechanisms that ask the public officer to justify one aspect of the project, with the threat of being punished if he fails: a random challenge mechanism and an alert-based mechanism that requires justifying one aspect on which the rivals of the winning contractor send a red flag. Relying on losing contractors enables the community to deter favoritism significantly more easily than the random challenge procedure as it allows to use information that is shared by potential contractors in the industry. The level of penalty needed to fully deter corruption is lower, independent of the complexity of the project and depends on the degree of differentiation within the industry. Below this threshold, favoritism occurs in some states of nature and we characterize and compare the different equilibrium patterns of corruption under both mechanisms. A more elaborate example suggests that the alert-based mechanism tends to lead to more standard specifications of projects.