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Regular version of the site

Working paper

Corrupt Reserve Prices

Working Papers of Faculty of Economics and Business Administration. 19/961. Ghent University, Belgium, 2019
Sümeyra A., Podkolzina E., Schoors K.
Procurement auctions are often plagued by favoritism and rent-seeking behavior. We develop a new methodology to red-flag potential favoritism in public procurement auctions with reserve prices, and apply it to Russian public purchases of gasoline between 2011 and 2013. Since the reserve price is set prior to the auction, it is independent of the identity of the winning seller in a fair and competitive auction. A procurer-seller pair is therefore red-flagged as potentially corrupt if it exhibits consistently higher reserve prices than the average reserve price of this procurer. Corrupt procurers limit auction entry so that their favored sellers face less competition in these auctions and are more likely to win them. Auctions with corrupt pairs also have higher final contract prices, implying considerable welfare losses. The inflationary effect of reserve price manipulation by corrupt procurer-seller pairs on final auction prices is mitigated by higher competition and fully offset by open bid e-auctions with sufficient competition.