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 wouldnt 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