Favouritism and corruption in procurement auctions

This paper analyses the impact of favouritism and corruption in procurement auctions in an emerging economy. There are two firms: one is the favoured one and the other is not the favoured one. 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 one, the winner can pay a bribe to inflate the reported quality. The same amount of bribe will inflate the reported quality of the favoured firm by a higher magnitude as compared to the firm which is not favoured. We show that favouritism induces inefficient outcomes, reduces competition and leads to lower expected equilibrium quality. The favoured firm also earns a higher payoff