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Bid-Rigging in Auctions for Korean Public-Works Contracts and Potential Damage

IN KWON LEE and KYUNGDONG HAHN
Review of Industrial Organization
Vol. 21, No. 1 (August 2002), pp. 73-88
Published by: Springer
Stable URL: http://www.jstor.org/stable/41799107
Page Count: 16
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Bid-Rigging in Auctions for Korean Public-Works Contracts and Potential Damage
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Abstract

This research is an empirical study to find solid statistical evidence of collusion in auction for construction contracts and to gauge the possible effects of bid-rigging on auction prices in Korea. Using limited information contained in sketch bid data, we show that local construction firms enjoy statistically significant incumbency premiums in their incumbent sites. Thus, it is inferred that contractors engage in complementary bidding, in which all bidders, except one, submit high bids so as to lose. The statistical evidence of the incumbency effect is also confirmed in long-running civil engineering construction contracts, which are carried out over several years. Utilizing the transition from a cooperative to non-cooperative regime, we also estimate the potential damage of structural bid rigging in public-works contracts by year, contractor and construction type. The estimated overcharge ratio based on a forecasting approach is 15.5% of the total expenditures from January 1995 to June 1998. We also present potential damage estimates by the firm. The estimated overcharge by contractor offers a guideline for the proper allocation of the total overcharges to construction contractors in case contractors are charged with bid-rigging and found guilty.

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