|
---------------------------------------------------------------------End
Editorial
Released on January 15, 2015 at 11:30 AM EDT
This article initially published on European
Journal of Political Economy
(35): 127.
Excerpts
and
brief review of the article as follows.
Corruption
in delegated public procurement auctions
In
this paper we theoretically analyse effects of corruption in public
procurements within a scoring-auction framework. A corrupt
administrators who acts on behalf of the public sector, receives a
kickback from the winning bidder. The administrators select the
scoring rule. The paper shows that such corruption always leads to
lower quality and lower price. Given
a level of corruption, a higher bargaining power of the
administrators in extracting bribes does not affect the quality but
leads to higher price.
In
the modern world Government contracts are typically awarded by
procurement auctions, which are also often used by firms
subcontracting work or buying services and raw materials. Clearly
public procurements constitute a significant part of the economic
activities in many countries. The
theory of auction provides the necessary analytical framework to
study such procurements. However, it may be noted that the benchmark
model of auctions is really a price-only auction where all other
characteristics of provision are assumed to be identical for all
potential vendors. Thus, in the traditional theory of standard
procurement auctions (where the auctioneer is the buyer), the
auctioneer cares only about the price of the object, but not the
other attributes. However, in many procurement situations, the buyer
cares about attributes other than price when evaluating the offers
submitted by suppliers. Non-monetary
attributes that buyers care about include quality — sometimes
along several observable/verifiable dimensions and time to
completion. For example, in the contract for the construction of a
new aircraft, the specification of its airworthiness and other
characteristics is probably as important as its price. Under these
circumstances, auctions are usually multidimensional. The essential
element of such multi-dimensional auctions is a scoring rule. In the
scoring auction, bidders are asked to submit multidimensional bids
that include price and some non-price attributes, such as quality.
The bids are then transformed into a score by an ex ante publicly
announced scoring rule, and the bidder whose score is the highest is
awarded the contract. There are many real life examples of such
scoring auctions.
For
example, the Department of Defence in the USA often relies on
competitive source selection to procure weapon systems. Each
individual component of a bid of the weapon system is evaluated and
assigned a score, these scores are summed to yield a total score,
and the firm achieving the highest score wins the contract. Many
state departments of transportation in the US use “A + B
bidding” for highway construction work in the United States, where
the highway procurement authorities evaluate offers on the basis of
their costs as well as time to completion, weighted by a road user
cost. A similar mechanism is used in auctions for electricity
reserve supply. Ministry
of Land, Infrastructure and Transportation in Japan allocates most
of the public construction project contracts through scoring
auctions based on quality-over-price ratio rules.
Researchers
in their model both the quality and the bidder's types are single
dimensional, types are identically and independently distributed and
the scoring rule is quasi linear. Researchers also analyses the
properties of optimal mechanisms when types are single-dimensional
but correlated. Researchers analyses the case when both quality and
types are multidimensional and the scoring rule is quasi linear and
analyses optimal mechanisms with one-dimensional quality and
two-dimensional discrete types. Further computes optimal mechanisms
with multidimensional quality and single-dimensional types that are
identically and independently distributed. Delegation, or empowering
one to act on behalf of another, is pervasive in the modern firm.
Shareholders delegate strategic decisions to managers; delegation is
efficient when managers allocate resources, including their own
efforts, in ways that do not divert from owners' objectives.
However, that separation in decision making also gives rise to
conflicts among the actors involved. A rather impressive body of
work has developed on related topics, including agency theory organizational
controls systems, organizational structure, strategic leadership,
strategic commitment theory and the role of irreversibility in
competitive interaction. Apart
from the above mentioned papers two recent contributions deserve
mention. In an experimental study researchers examines some aspects
of delegating decision rights for future rewards as an alternative
to corruption.
The
study finds that even the pure anticipation of future rewards from a
lobbying party suffices to bias a decision-maker in favour of this
party, even though it creates negative externalities to others. In a
rent-seeking model, examines the relationship between political
corruption and the composition of public spending. It may be noted
that the impact of corruption on procurement auctions may be huge in
terms of efficacy of the project and thus merits discussion.
Surprisingly, none of the papers in the literature on scoring
auction has touched upon this aspect. As such, we endeavour to fill
up this gap in the literature.
The
literature so far has not dealt with the case where a corrupt,
politically appointed government representative acts on behalf of
the government agency and chooses the rules of the scoring auction.
This situation is quite common in many countries.
For
example, in local economies like municipalities, large
infrastructure projects (roads, airports) are often commissioned by
public sector organisations. The contracts for such projects are
typically awarded through an auction and often some form of scoring
auction is used. The public sector is typically controlled by its
administrators, who act as public representatives and thus often
have substantial say in this procurement process. Consequently, they
have significant influence on the design of the scoring rules also.
Problem arises when a public sector is saddled with a administrators
who is not honest. A typical corrupt administrator receives a bribe
from the winning bidder. In short, the administrator has the power
to act on behalf of the public sector and he decides on the rules of
the auction. In particular, he/she has a say in the selection of the
scoring rule to be used, which need not reflect the true utility of
the public sector or representative voter of the region. The scoring
rule so selected is geared towards increasing the utility of the
corrupt administrator.
Editor
WikiLeaks Sudbury
January 2015
Related
Articles
Corruption in delegated
public procurement auctions
Reference
Krishnendu, K.G.; Mukherjee, D. (2014). Corruption in delegated
public procurement auctions
European Journal of Political Economy,
(35), 122–127.
|
