Does surround‐bidding corruption hurt procurers?

Abstract

AbstractWe consider a model of corruption in the form of surround‐bidding in a first‐price procurement auction in which bidders' private cost follows uniform distribution. We find that the briber's high‐price bidding function is less aggressive than honest suppliers' while his low‐price one is more aggressive. As the bribery cost increases, both the briber's low‐price and high‐price bidding functions become less aggressive. The winning probability and expected profit of the briber increase, while the winning probability and expected profit of honest suppliers decrease. Surprisingly, although the briber's high‐price bid may be the winning bid, which is harmful to the procurer, the procurer's expected payment decreases, that is, the procurer benefits from surround‐bidding corruption, because the benefit due to more intense competition outweighs the harm caused by the briber's high‐price bid.