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

Abstract

This research is an empirical study to find solid statistical evidence of collusion inauction for construction contracts and to gauge the possible effects of bid-rigging onauction prices in Korea. Using limited information contained in sketch bid data, weshow that local construction firms enjoy statistically significant incumbency premiumsin their incumbent sites. Thus, it is inferred that contractors engage in complementarybidding, in which all bidders, except one, submit high bids so as to lose. The statisticalevidence of the incumbency effect is also confirmed in long-running civil engineeringconstruction contracts, which are carried out over several years. Utilizing the transitionfrom a cooperative to non-cooperative regime, we also estimate the potential damage ofstructural 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.