Three essays on corruption and auctions

Defence date: 1 December 2014Examining Board: Professor Massimo Morelli, Bocconi University, Supervisor; Professor Andrea Mattozzi, EUI; Professor Marco Celentani, Universidad Carlos III; Professor Matthias Dahm, University of Nottingham.This thesis contributes to the understanding of corruption and auctions. It consists of three chapters focusing on diverse aspects of these two general topics as well as their combinations, from an applied microeconomic theory perspective: (i) the effects of corruption on bidding behaviour in all-pay auctions and the auctioneer’s decisions, (ii) the use of central bank bond auctions as tools to measure banks’ liquidity risk, and (iii) the persistence of corruption and corruption differences between similar economies. As discussed in recent bibliography, auctions performed by an intermediary between the seller of the good and buyers can be penetrable by corruption. Furthermore, corruption can enter auctions in different forms. In the first chapter of this thesis, entitled Corruption in All-Pay Auctions, we compare the effects of pure pecuniary corruption and favouritism on bidding behaviour and the auctioneer’s expected revenue, in the context of All-Pay Auctions, used to model lobbying, labour-market tournaments and competition for monopoly power. We provide conditions under which favouritism makes bidders more or less aggressive than in the benchmark model without corruption, and prove that bidders are always more aggressive when faced with a non favouritist corrupt auctioneer. In both cases, the revenue maximizing auctioneer deprives his collaborator of all "surplus" of corruption. Finally, we study the auctioneer’s choice of corruption type, and find that his expected revenue is not necessarily monotonic in the probability that he choses one type of corruption or the other. In the second chapter, entitled Bond Auctions and Financial Sector Liquidity Risk, a joint work with Grégory Claeys, we aim to provide a tool for central banks – and in particular for the Central Bank of Chile – to measure liquidity risk in their financial sector using the bidding behaviour of banks in bond auctions. First, we build a model combining the auction literature and the financial economics literature to understand precisely the effect of the liquidity risk affecting banks on their bidding strategies in those auctions. We develop a benchmark version of the model with no insurance against the liquidity shock, and another with a lender of last resort to see how the behavior of the banks is affected by this policy. Based on the revelation principle characterizing auctions, and using a unique dataset collected at Central Bank of Chile containing all the details of its open market operation auctions (where it sells bonds to drain money from the banking sector) between 2002 and 2012, we estimate the distribution of the liquidity risk across Chilean banks and its changes over time. The evolution of the estimated distribution seems to capture well the main episodes of liquidity stress of the last decade in the Chilean banking sector. This measuring tool could be used by other central banks conducting similar open market operations and in need of evaluating in real time the evolution evolution of the liquidity risk affecting their financial sector. In the third chapter, entitled Strategic Complementarities and Corruption, we study an environment where agents compete against each other for the acquisition of a public good procurement project, assigned by the government and handled by a possibly corrupt inspector. We find that there exists multiplicity of equilibria, and in specific both "good" equilibria without corruption, and "bad" equilibria where corruption arises. This is very useful for us to interpret why countries that are quite similar in all other characteristics, can differ a lot in the level of corruption in their economy. Our result is consistent with recent bibliography on procurement, however multiplicity of equilibria in our model arises without any particular assumptions on the preferences of individuals. In our effort to confirm the multiplicity of equilibria also in the repeated game, we find that inspectors might consider it profitable to suffer negative payoffs in the first period of the game, in order to create more fuzziness as to how much corruption there is in the economy, and thus decrease the probability of getting caught for everyone, guaranteeing themselves bigger positive payoffs in their last period in the game