Public procurement - the purchasing of works, goods, and services by governments and other public authorities – accounts for approximately 12% of gross domestic product (GDP) in OECD countries (OECD 2019). The volume and financial stake of transactions, combined with the complexity of the process and the close interactions between public officials and companies, make this key government activity particularly prone to corruption. It is estimated that billions of euros are lost globally every year to corruption in public procurement (Transparency International 2006).

Theoretical studies on this topic typically focus on a setting where benevolent politicians delegate the administration of the procurement process to public officials who can be self-interested and abuse their discretion to manipulate the process in exchange for a bribe (Laffont and Tirole 1991, Laffont and Tirole 1992, Burguet and Che 2004). For example, they can bias the tender award in favor of one of the bidders or allow the contracting firm to embezzle public funds by increasing expense claims or lowering delivered quality via fraudulent invoices. 

While the research above can explain the occurrence of bureaucratic corruption, it rules out the potential role of politicians. However, as the most severe episodes of corruption show, politicians are not only often involved in corrupt deals, they promote them. In fact, politicians have a number of ways to systematically interfere with the procurement process and guarantee their own participation in corrupt arrangements. For example, they can decide on the allocation of funds to projects or drive the employment of complicit procurement officials. Thus, as the involvement of politicians exacerbates the problem, it is important to study in detail such mechanisms of undue influence on the procurement process.

Chiappinelli (2020) contributes to this objective by proposing a theoretical framework to investigate one possible mechanism: the influence of politicians on the monitoring of the execution of public contracts. The study considers the case that politicians are not benevolent but rather partially selfish and can design the contract auditing policy. It finds that selfish enough politicians choose a lax auditing policy in order to induce embezzlement by the contracting firm and then claim a share of the embezzled funds.

These results are useful for informing the design of policies directed to curbing corruption in public procurement. For example, the monitoring of the execution of public contracts, which in many countries is the responsibility of a public official employed or appointed by the purchasing authority, could be shifted to - or at least supervised by - an external independent authority.

Olga Chiappinelli (DIW Berlin)

This text is jointly published by BSE Insights and BCCP News.

References

Burguet, Roberto and Che, Yeon-Koo (2004), “Competitive procurement with corruption”, The RAND Journal of Economics, 35 (1), pp. 50-68

Chiappinelli, Olga (2020), “Political corruption in the execution of public contracts”, Journal of Economic Behavior & Organization, (Nov. 2020) pp 116-140

Laffont, Jean-Jacques and Tirole, Jean (1991), “Auction design and favoritism”, International Journal of Industrial Organization, 9 (1), March 1991, pp 9-42

Laffont, Jean-Jacques and Tirole, Jean (1992), “Cost padding, auditing and collusion”, Annales d'Economie et de Statistique, (25-26), pp. 205-226.

OECD. “Public procurement spending,” in Government at a Glance 2019. OECD Publishing, 2019

Transparency International 2006 “Handbook for curbing corruption in public procurement”. Transparency International