Auditing Collusion in Public Procurement Quality: An Empirical Study

University of Glasgow

with Rieko Ishii (Shiga University)

By using a unique dataset of public procurement auctions and construction audit scores, we investigate detected tacit collusion between auditors (supervisors) and construction firms (agents), in which auditors and firms collude to cut corners in quality audits, resulting in relatively low-quality construction. In this collusion, the auditors (municipal officers) partially neglect to carry out quality checkups. Knowing that is the case, construction firms cut their costs to improve the quality of the construction. Eventually whistle-blowing happens, and a subsequent scrutinization by the principal (municipal authority) halts this tacit collusion, as well as revealing the poor quality of past procurement constructions. After the whistle-blowing, the firms improve the quality of procured projects by 7 to 10.2 percent. However, as an unintended consequence, such quality improvement comes with an increase in procurement auction prices. The municipal’s expenditure on construction increases by 1.4 percent after the end of the auditor-firm collusion, indicating that, when it comes to public construction procurements, the old adage “you get what you pay for” can apply.