New collection - n°1 ETA Chair Memo
This paper studies firms’ incentives to commit to transparent behavior in a competitive procedure modeled as an asymmetric information beauty contest managed by a corrupt agent.
In his evaluation of firms’ offers for a public contract, the agent has some discretion to favor a firm in exchange for a bribe. While unilateral commitment to transparency is never incentive compatible, under some circumstances a voluntary but conditional commitment mechanism can eliminate corruption. It is only when the agent’s discretion is strong and the market’s profitability is small that a low quality firm may prefer not to commit. In that situation, the high quality firms commit when commitment decisions are kept secret, but some conditions on firms’ beliefs are required when commitment decisions are publicly announced. A mechanism combining both conditionality and a reward (a transparent selection advantage that need not be large) allows to completely eliminate corruption.