Collusion by Exclusion in Public Procurement

Abstract

This paper studies bid-rigging in auctions with bidder preselection. We develop a theoretical model to analyze the optimal behavior of a partial bid-rigging cartel and show how commonly used two-stage auction formats, in which the first stage is used to preselect bidders, may be exploited. Bidder preselection based on opening bids allows cartels to exclude competitive rivals and thereby increase procurement costs above what would be possible without preselection. To test our predictions, we use administrative data on public procurement auctions in Slovakia. We develop a collusion marker reflecting the optimal cartel strategy and identify bidders suspected of collusion. In auctions where collusive bidders participate, savings, defined as the difference between reserve price and winning bid, are lower by 3.2 percentage points. After a selective auction procedure was abandoned, collusive bidders adjusted their strategy, and the difference in savings between collusive and competitive auctions decreases to 1.3 percentage points, closing almost 60% of the difference.