Government Official-Initiated Bid-Rigging: A Simulation-Based Approach Using Gaming and Agent-Based Methods

Abstract Our study explores the conditions and incentives for government officials in procuring entities (orderers) to initiate bid-rigging and the measures to deter it. First, we used gaming simulations with human agents to investigate the factors that enhance bid-rigging in public procurement. Next, we utilized agent-based modeling and simulation to replicate and verify the gaming simulation. Finally, we used the verified agent-based model and simulations to explore deterrence measures for government official-initiated bid-rigging. We specified two critical factors from the gaming simulation: the type of orderer players and the sense of compliance with social rules. We demonstrated that a strong orderer, unaffected by the surrounding players, could considerably enhance bid-rigging norms. In comparison, a weak orderer affected by the surrounding players was less effective at this enhancement. Next, we replicated the results of the gaming simulations in an agent-based simulation. The results of the agent-based model and simulations revealed that the chance of auction failure was more critical than weakness in the sense of compliance with social rules when a weak orderer intended to establish bid-rigging norms. Finally, we implemented the two existing significant measures into the agent-based models and simulations. In instances where the quality problem of procured goods was not critical, flexible setting of reserve prices was practical; conversely, in cases where bidders encountered challenges in accurately estimating reserve prices or effectively executing contracts, it became imperative to increase both the surcharge and the detection rate for bid-rigging.