BID RIGGING AND THE THREAT OF GOVERNMENT PROSECUTION

In this article, I develop a simple bidding model in which collusion i s endogenous. Buyers at a first-price sealed-bid auction decide whethe r to rig their bids given that they face the threat of government pros ecution. A legal authority chooses whether to investigate the buyers o n the basis of the bids tendered. In the unique sequential equilibrium of the game, buyers rig their bids with positive probability, but the legal authority can never ascertain, on the basis of the bids alone, that a conspiracy has formed.