Avoiding the collusion among the bidders and the agent in sealed-bidauctions1

Abstract

We study an auction in which bidders can bribe the auctioneer before they bid and before they know the identity of the winner, with the auctioneer lowering the winner’s bid if the winner is bribed. We show that, in second-price sealed-bid auctions, given the size of the bribe set by the auctioneer, none of the bidders do pay the bribe and every bidder bids his valuation. We also show that the revenue equivalence theorem breaks down when there is bribery because the proposed corruption does not work in the second-price sealed-bid auctions. The first-price and second-price auctions do not yield the same expected revenue to the seller.