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

Incentives for Informal Contract Enforcement: The Case of Russian Public Procurement. Svetlana Pivovarova XI HSE International Academic Conference on Economic and Social Development Problems , April 8, 2010. International practice. Free choice (limited):

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

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  1. Incentives for Informal Contract Enforcement:The Case of Russian Public Procurement Svetlana Pivovarova XI HSE International Academic Conference on Economic and Social Development Problems, April 8, 2010

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

  3. Russian public procurement law • Free choice facilitates corruption • Excessive use of reputation hinders competition • Limited choice + federal reputational database

  4. 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

  5. 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

  6. 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)

  7. 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

  8. Model setup: agents • The procurer is sensitive to quality: • Utility function , , • Suppliers are different in production costs and legislative costs • Production costs:

  9. 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

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

  11. Contracting stage results • Extreme cases: • - dumping the price to zero may be profitable for the supplier; • - the contract may be breached but the procurer wouldn’t go to court

  12. 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

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

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