Incentives for Informal Contract Enforcement: The Case of Russian Public Procurement

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Incentives for Informal Contract EnforcementThe
Case of Russian Public Procurement

• Svetlana Pivovarova
• XI HSE International Academic Conference
• on Economic and Social Development Problems,
  April 8, 2010

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International practice

• Free choice (limited)
• who you chose from prequalification
• how you chose procedure.
• Reputation
• ability to use previous experience.
• Warrants
• Legalistic enforcement

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Russian public procurement law

• Free choice facilitates corruption
• Excessive use of reputation hinders competition
• Limited choice federal reputational database

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Problems formal enforcement

• Lack of prequalification
• Prevailing procedure first-price auction
• Hard to access quality
• Official List of Dishonest Suppliers
• The procurer CAN (but is not obliged to) use the
  list
• Judicial system imperfect and slow

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Hints from the survey

• 80 - receiving goods with bad quality that
  meet official requirements is a serious problem
• Direct negotiation vs. court 46 vs. 9
• Fears
• One-day firms
• Administratively powerful firms
• Under-qualified firms
• Subcontracting to unknown supplier

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Modeling the imperfect court

• Punishment is less than the damage (Doni, 2006)
• Only a certain proportion of breached contracts
  is enforced (Anderson and Young, 2002)

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Modeling the imperfect court

• Punishment is exogenous
• The loosing side pays a fine A in favor of the
  winning side
• The proportion of breached contracts is
  enforced
• The court is costly
• Fixed legislative costs for the procurer and the
  supplier, and

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Model setup agents

• The procurer is sensitive to quality
• Utility function , ,
• Suppliers are different in production costs and
  legislative costs
• Production costs

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Model setup rules of the game

• Single indivisible object with minimum acceptable
  quality
• First price sealed bid auction
• The supplier may breach the contract by supplying
  
• The procurer may apply the case to court

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Contracting stage results

• The suppliers are characterized by
• and
• If the supplier always
  produces zero quality
• High production costs with
• Low legislative costs

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Contracting stage results

• Extreme cases
• - dumping the price to zero
  may
• be profitable for the supplier
• - the contract may be breached
  but
• the procurer wouldnt go to court

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Auction stage results

• If production costs for all suppliers are high
  the legalistically efficient wins and produces
  zero
• Eliminating bids lower than
• is profitable for the procurer

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Future research

• Adding costly use of reputation and\or
  elimination of low bids
• Further analysis of regional and survey data