Review of Industrial Organization 21: 73–88, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Bid-Rigging in Auctions for Korean Public-Works
Contracts and Potential Damage
IN KWON LEE
and KYUNGDONG HAHN
Korea Economic Research Institute, Center for Law & Economics, Yoida-Dong, Yeongdungpo-ku,
150-756 Seoul, Republic of Korea
Department of Economics, Hankuk University of Foreign Studies
Abstract. This research is an empirical study to ﬁnd solid statistical evidence of collusion in auc-
tion for construction contracts and to gauge the possible effects of bid-rigging on auction prices in
Korea. Using limited information contained in sketch bid data, we show that local construction ﬁrms
enjoy statistically signiﬁcant incumbency premiums in their incumbent sites. Thus, it is inferred that
contractors engage in complementary bidding, in which all bidders, except one, submit high bids so
as to lose. The statistical evidence of the incumbency effect is also conﬁrmed in long-running civil
engineering construction contracts, which are carried out over several years. Utilizing the transition
from a cooperative to non-cooperative regime, we also estimate the potential damage of structural
bid rigging in public-works contracts by year, contractor and construction type. The estimated over-
charge 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.
Key words: Bid-rigging, complementary bidding, damage estimation.
JEL Classiﬁcations: L13, L40.
In many countries, bid-rigging cases in the construction industry have traditionally
involved many criminal cases ﬁled by antitrust agencies. Bid-riggings are naked
restraints of trade and, per se illegal under the antitrust laws. Bid-riggers generally
utilize two types of bid schemes to allocate contracts in an auction, namely, rotat-
ing and complementary bid schemes.
Cartel members can employ a rotating bid
This article is a revised version of the paper presented at the Annual Conference of the Korean
Industrial Organization Society in February 2001. We are grateful to Youngsan Kim, Sung Wook
Joh, and seminar participants at the Conference for their helpful suggestions. We also thank sem-
inar participants at a regular workshop of Korean Law and Economics Association for their helpful
comments. Special thanks go to the Editor and referees of this journal. The usual caveat applies.
The antitrust agency needs to distinguish between collusive behavior and non-cooperative be-
havior, both of which lead to supra-competitive proﬁts since some statistical indicators generally