Public Markets Tailored for the strongCartelstrong - Favoritism in.pdfVIP

Public Markets Tailored for the Cartel - Favoritism in Procurement Auctions - y z Ariane Lambert-Mogiliansky, Gregoryi Kosenok January 6, 2006 Abstract In this paper, we investigate the interaction between two Örms engaged in a repeated procurement relationship modelled as a multiple criteria auction, and an auctioneer (a government employee) who has discretion in devising the selection criteria. A Örst result is that in a one-shot context, favoritism turns the asymmetric informa- tion private cost procurement auction, into a symmetric information auction (in bribes) for a common value prize. In a repeated setting we show that favoritism substantially facilitates collusion. It increases the gains from collusion and contributes to solving basic implementation problems for a cartel of bidders that operates in a stochastically changing environment. A most simple allocation rule where Örms take turn in winning indepen- dently of stochastic government preferences and Örmsícosts is optimal. In each period the selection criteria is Öne-tailored to the in-turn winner: the environmentî adapts to the cartel. This result holds true when the expected punishment is a Öxed cost. When the cost varies with the magnitude of the distortion of the selection criteria (compared with the true governmentís preferences), favoritism only partially shades the cartel from the environment. Collusion is sustainable in a simple but contingent scheme that under some conditions approaches full cartel e¢ ciency. We thus Önd that f