Bribery and Favoritism by Auctioneers in Sealed Bid Auctions

We consider a model of bribery and favoritism in a sealed-bid first-price procurement auction. The auctioneer can award the contract to a dishonest supplier at the low bid of an honest supplier. We examine the equilibrium bidding functions of both suppliers when it is common knowledge that the dishonest supplier can bribe the auctioneer. Both efficient and inefficient bribes can arise and the resulting allocative distortion differs from the distortions in a first-price auction or an optimal auction. The expected price paid by the buyer is generally higher with bribery, but when efficient bribes occur, there can be cases in which bribery results in a lower expected price. We also examine the incentives for cost-reducing investment by the suppliers and find that bribery results in a lower industry capacity than the social optimum. Finally, we examine upfront bribes in which the suppliers compete to be favored by the auctioneer and find that the stronger supplier will pay a larger bribe than the weaker supplier.