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Collusion – Government as the victim or as the perpetrator

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.“
– Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nation

There is an almost consensus among economists that collusion among firms is socially undesirable, mostly, because private benefit tends to come at the expense of overall efficiency. Collusion is an agreement between two or more parties, usually secretive, to defraud or gain an advantage over a third party. Cartels exert explicit collusion, which, interestingly, is not always illegal. The  OPEC[1] has just celebrated its 54th anniversary as an economic cartel, which colludes in influencing world oil prices by controlling supply. In certain industries, particularly Oligopolies, there is tacit collusion, unwritten rules of collusive behaviour that have not been explicitly discussed.
Collusion can be seen in all levels of society: from couples colluding in divorce cases, misreporting adultery to accelerate the process, to Major League Baseball owners coming together to restrict player’s salaries.

The Government as the victim

Often, not only individuals but also governments are seen as powerless victims of the private sector’s collusive behaviour. Take public auctions, whenever the Government chooses to sell a public asset, an arm struggle begins between seller and buyers. Bidders have no incentive to reveal their true valuation of the good and while auctions help the government in getting a fair valuation for public assets, collusion is still a reality.
In a recent paper , Kawai and Nakabayashi have shown evidence of widespread collusion among construction firms for most construction projects procured by the Japanese government from 2003 to 2006. They identify about 1,000 firms whose conduct is inconsistent with competitive behaviour in auctions for which there are  rebids[2]. The authors estimate that the government would have saved over $700 million in the absence of collusion. A possible explanation for this is that the two-stage auction gives the firms time to collude. While some rules might help, collusion will not disappear all together, as it is in our nature to explore loopholes and stretch boundaries for our own benefit. And since it is easier for an organization to become amoral than for a natural person, it is predictable that firms (and governments) fall into collusive behaviour more often, and with bigger consequences, than individuals.

The Government as the perpetrator

When it comes to collusion, some governments are far from innocent. Adam Smith, following this post’s opening quote, claimed that it is the responsibility of governments and lawmakers to “do nothing to facilitate such assemblies; much less to render them necessary.” However, in many instances, corrupt governments become facilitators of collusion in exchange for bribes. Other times, the return is less obvious, political support, tacit future benefits etc., and falls in a legal grey area. Take, for example, the numerous questionable cases in the universe of American political campaigns.
Ultimately, Governments themselves display collusive behaviour. This happens often associated to security forces often embodied in the intentional failure to keep records and the withholding of intelligence. Collusion with the press is also a recurrent problem: Critics have questioned the intentions behind the White House’s annual  WHCA[3] dinner. While there is some correlation between corruption and collusion, the second is a much more ambiguous and inclusive concept. Therefore, it becomes very hard to compare levels of collusive behaviour across governments.

Collusive behaviour is a threat to efficiency but that’s not all. It undermines the integrity of society as a whole, more fundamentally so, when we are talking about the government. Firms are always faced with suspicion but governments can hide behind the “it’s all for the greater good” veil. A country whose government is open to collusive behaviour stands little chance of controlling collusion among private agents. As Smith saw it, the real danger might be collusion, not among businessman, but between businessman and the government. Thus, if a fight against collusion is to be waged in the name of efficiency, governments should look inwards first.

Margarida Anselmo, 715

[1] Organization of the Petroleum Exporting Countries.
[2] Rebids occur when the initial bids fail to meet the reserve price.
[3] White House Correspondent’s Association, an organization of journalists who cover the White House and the President of the United States which is supposed to operate independently of the White House.


Author: studentnovasbe

Master student in Nova Sbe

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