Bribery and corruption arising from procurement are rampant in developing countries. According to the World Bank, bribery is involved in US$1.5 trillion worth of government contracts for goods and services. Organizations worldwide are joining hands to tackle this endemic and growing problem. Filling an important knowledge gap, HKUST’s Ying-Ju Chen and co-researchers conduct a novel investigation of “disparate corruption pressure”—the phenomenon whereby small firms feel greater pressure to pay bribes than do their larger rivals.

Typically, potential suppliers tender for a government contract with sealed bids, and the lowest price wins. If a bidder bribes the auctioneer to divulge its rivals’ best offer, it can win the auction. Small firms are the most likely culprits. “Small manufacturers may be eager to win the contracts to survive in the market,” explain the researchers, “or have lower bargaining power relative to the intermediary, and hence they have to pay bribes to participate in the procurement auction.” Disparate corruption pressure is a common issue in procurement, but it is surprisingly underexamined in the literature. “This observation motivates us to make an initial attempt to examine its impact on the bribery decision (to bribe or not to bribe) and bidding strategies (how much to bid),” say the researchers.

The authors imagine two companies bidding for the same contract. S is large and able to determine when to bribe strategically. W is smaller and weaker, and a committed briber. This setup, they say, is “the main difference” between their paper and the way corruption is typically modeled in the literature. This provides a critical starting point for “the first attempt to analyze an endogenous bribery decision which creates a signaling problem,” the researchers note. The signaling issue is key to their analysis.

Scale gives S, the larger bidder, a cost advantage over its opponent. The smaller bidder bribes the auctioneer to “decide whether to win the contract by submitting a winning bid that is slightly below the current lowest bid.” Should the bigger bidder use its scale advantage to also bribe the auctioneer to reveal the other bid and win the contract? The answer is no, according to the researchers. The bigger bidder has no economic incentive to reveal the bid, they explain; on the contrary, “it benefits from the corruption.”

The stronger firm’s decision to bribe would send “a precise signal” about its production costs. “To avoid leaking cost information and intensifying the competition,” the researchers tell us, “the best strategy for S is to refuse bribery at all times.” Furthermore, bribery is expensive; the smaller company’s costly decision to pay up may reinforce the stronger firm’s cost advantage. “Hence, there is no incentive for S to expose such illegal practice,” the authors say. They add that this is is “a plausible explanation” for the concealment of corrupt procurement auctions—a ubiqitous practice.

This paper departs from the literature in that it examines disparate corruption pressure on bidders of different scales in a model where one player always bribes and the other can choose. Future research could relax this stricture by allowing each bidder to decide for itself whether to suborn the bidding process. Such meaningful extensions and implications could help governments and the private sector to understand, identify, and prevent corruption in procurements in developing countries.