An Economic Analysis of Debarment

Abstract

With a view to reducing the consequences of corruption in public procurement, many governments have introduced debarment of suppliers found guilty of corruption and some other forms of crime. This paper explores the market effects of debarment on public procurement. Debarment is found to make little difference in markets with high competition, while in markets with low competition it may deter corruption as long as firms value public procurement contracts in the future and there is a certain risk of being detected in corruption. On the other hand, debarment -when it works -has an anti-competitive effect, and this effect will contribute to facilitate collusion between suppliers. Debarment may work as a tool against collusion, but only if targeting one firm at the time (such as a ring-leader or the specific beneficiary when the collusion is detected) -and not all the members of a cartel. If designed with an understanding of the market mechanisms at play, debarment can deter both collusion and corruption, thus improving the results of public procurement. If so, most current debarment regimes need modification.JEL Classification: K21, K23, K42, L41, H57

Debarment and collusion in procurement auctions

“…To the best of our knowledge, we present the first experimental study on the impact of debarments on collusion in procurement auctions. On the one hand, we extend the small literature on debarment and corruption (Auriol and Søreide 2017) by exploring the effect of debarment on collusion. While Coey, Larsen, and Sweeney (2019) investigate the expected revenue drops resulting from a counterfactual bidder exclusion (i.e.…”

“…Despite their widespread use, evidence on the effects of debarments on anti-competitive bidding practices or other types of illegal behavior remains scarce. The only existing study on debarments is theoretical and focuses on their effect on corruption (Auriol and Søreide 2017). The study shows that debarments will effectively deter corruption in small markets if the probability of debarment is sufficiently high and if bidders sufficiently value contract awards in future procurement auctions -a finding that is consistent with the classical model of crime, according to which the deterrent effect of a sanction depends on its expected costs (Becker 1968).…”