Corruption and competition in procurement

We consider a procurement problem in which the procurement agent is supposed to allocate the realization of a project according to a competitive mechanism that values bids in terms of the proposed price and quality. Potential bidders have private information about their production costs. Since the procurement agent is also in charge of verifying delivered quality, in exchange for a bribe, he can allow an arbitrary firm to be awarded the realization of the project and to produce a quality level lower than that announced. We compute equilibrium corruption and we study the impact on corruption of the competitiveness of the environment, and in particular of: (i) an increase in the number of potential suppliers of the good or service to be procured, and (ii) an increase of competition in the market for procurement agents. We identify the effects that influence equilibrium corruption and show that, contrary to conventional wisdom, corruption may well be increasing in competition.Marco Celentani acknowledges the financial support of DGES of MEC (Spain) under projects UE95-0042 and PB98-00024 and of MURST (Italy) under project 9813282901 004. Juan-Jose Ganuza acknowledges the financial support of the Spanish Ministry of Science and Technology under project BEC2000-1026Publicad