Favouritism and corruption in procurement auctions?

This paper analyses the impact of favouritism and corruption in procurement auctions in an emerging economy. In our model there are two firms: One is the favoured one, while the other is not. The firm that wins the contract needs to supply a good that meets a certain quality standard, failing which its payment would be withheld. There is corruption in the system: If the measured quality falls short of the minimum stipulated level, the winner can pay a bribe to inflate the reported quality. The same amount of bribe inflates the reported quality of the favoured firm by a higher magnitude as compared to the firm which is not in favour. It is shown that favouritism induces inefficient outcomes, reduces competition and leads to lower expected equilibrium quality. The favoured firm also earns a higher payoff. The welfare effects of favouritism are ambiguous and we illustrate our results with an example. (c) 2023 Elsevier B.V. All rights reserved.