In LFC, what would prevent "bid-rigging"?

[Joynewyeary]

Suppose that a proper government of the sort that Objectivism advocates wants some work done on a military installation and wants to control costs by demanding sealed bids from various private contractors. What ethical and effective methods could such a government use to ensure that the sealing has any significance? In other words, what would prevent bid rigging?

[softwareNerd]

Even today there are probably many controls and checks in place. Physical controls (like envelopes with tamper evident seals) are the most obvious. Another form of control is where more than one person is required to perform a task: like the missile launcher or safe-deposit boxes that require two keys. All sorts of controls have been design over centuries to make it more difficult to cheat, to make cheating more evident, or to more easily catch the culprit. other than controls, there is also punishment if one gets caught doing something illegal.

[AisA]

In other words, what would prevent bid rigging?

I guess I do not understand bid rigging. Can you elaborate?

[softwareNerd]

Oops! I was so focused on the "sealing" that I didn't pay enough attention to the "bid rigging".

As I understand it, bid rigging happens like this: Contractor Adam tells me it will cost be $1000 to fix my chimney. I call a Contractor Bob. He comes out and is about to bid $500, when he notices a little mark on the chimney. He recognizes this as a mark left by his buddy, Adam. The mark is coded to indicate that Adam has quoted $1000. So, Bob quotes $1200. If Adam gets my business, he sends Bob a check for $100 (or whatever). Between Adam and Bob, they figure this is the way to earn more money. Additionally, to make such examples a "problem", they will usually have an extra constraint: e.g. how can I get around this is Adam, Bob and their third pal Charlie are the only chimney contractors in my little town.

In essence bid-rigging happens when two or more parties are pretending to compete for my business, to give me an artificial sense of having got the best deal, but are actually collaborating with each other.

[DavidOdden]

What ethical and effective methods could such a government use to ensure that the sealing has any significance? In other words, what would prevent bid rigging?

The same as prevents perjury: it could be a crime to conspire to submit false bids. I don't see the rationality of requiring sealed bids, which encourages this kind of dishonesty. If companies openly compete for the contract, an upstart third company can cut the legs out from under the conspiring companies, by making a bid that is lower than either of those two bids. But if you insist in your mock-Objectivist government that they would insist on sealed bids, you can make it a crime to submit a fraudulent offer.

[jrs]

http://en.wikipedia.org/wiki/Auction

I suggest using a reverse Vickery auction.

[Joynewyeary]

The same as prevents perjury: it could be a crime to conspire to submit false bids. [...]

1. By what authority would the government make it a crime to rig bids for work that the government wants done? Suppose that a private company that doesn't do any work for the government wants some work done and requests sealed bids. Would it be consistent with Objectivism if bid rigging in that situation were classified as a crime?

2. Would classifying rigging bids for government work as a criminal offense be sufficient to prevent the rigging of bids? For example, consider alcohol prohibition. Is law sufficient if people do not respect the law?

[JMeganSnow]

The same as prevents perjury: it could be a crime to conspire to submit false bids. I don't see the rationality of requiring sealed bids, which encourages this kind of dishonesty. If companies openly compete for the contract, an upstart third company can cut the legs out from under the conspiring companies, by making a bid that is lower than either of those two bids. But if you insist in your mock-Objectivist government that they would insist on sealed bids, you can make it a crime to submit a fraudulent offer.

Say what? There's nothing wrong with businessmen getting together to all charge the same price for something. If their price is too far above the market level, the result will be a competitor entering the market and undercutting their prices. This applies whether the purchaser is you with the broken chimney or the government ordering 500 fighter jets.

Heck, it probably applies MORE with the government, because the competition for such a hefty project (as well as the impetus to shop around) is MUCH higher if you're buying something THAT expensive.

This is one of the "crimes" that falls under anti-trust. Re-read CUI (esp. about the General Electric et al trial) and you'll see what I mean.

[DavidOdden]

Say what? There's nothing wrong with businessmen getting together to all charge the same price for something. If their price is too far above the market level, the result will be a competitor entering the market and undercutting their prices.

The example I'm addressing has to do with fraudulent bids, where A bids higher so that B would be the lower bidder, and A isn't honestly bidding. Frankly I think the original question was silly because it's based on a bogus presumption, that the government would want information on bids to be secret. However, just supposing that there is a rational basis for requiring that all bids be sealed (and I utterly dispute that presumption), then the government can certainly make a law that requires it, just as the government can rightly make a law demanding that testimony be truthful. This has no bearing on contracts with private companies, and such a law would only be relevant for contracts with the government. The flip side is, of course, that the govenment has no right to impose any sealed bids on dealings between private parties. The government does, however, have the obligation to enforce an agreement that might be entered into between a purchaser and people bidding on a contract, if the private purchaser elects to require non-communication between bidding parties. Getting a bid through such means when there is an agreement to not conspire on the price would be fraud.

[Joynewyeary]

This has no bearing on contracts with private companies, and such a law would only be relevant for contracts with the government.

What justification could there be for special laws concerning contracts with the government that don't apply to contracts in general?

Getting a bid through such means when there is an agreement to not conspire on the price would be fraud.

If there is an agreement to not conspire on the price, then wouldn't violation of that agreement be a breach of contract? In what cases do you think that a breach of contract should be classified as fraud?

[JMeganSnow]

The example I'm addressing has to do with fraudulent bids, where A bids higher so that B would be the lower bidder, and A isn't honestly bidding.

Isn't this somewhat the result of the situation where the government is required to take the lowest bid (supposedly to save money)? If the government functioned (strictly in its purchasing capacity) like a regular business that can shop around, negotiate deals, etc., would there be any significant problems with the approach?

I hadn't noticed that there was a lot of problem with fraudulent bids of this type in private industry. Sure, you can get taken if you don't pay attention . . . that's why there are services like Kelly Blue Book that prices expensive items for purchasers, so they know approximately what they ought to pay.

Hmm . . . instead of some draconian sealed bids procedure, why not just send financial advisors to look over the books of the bidding companies? Major corporations do this all the time . . . allowing an auditor to go over the books before committing to purchase is standard practice when buying something truly imposing, like another company, isn't it?

Businesses are under no obligation to give ANYONE a "fair" or "market-correct" price . . . it's up to the purchaser to exercise his judgement before buying something, so I hardly see how even fixing bids could be considered fraud. It might be true that they could do it for less, but what they're giving you in a bid is the amount of money they want in order to perform the service.

It's similar to the idea of price gouging.

[Unconquered]

Businesses are under no obligation to give ANYONE a "fair" or "market-correct" price . . . it's up to the purchaser to exercise his judgement before buying something, so I hardly see how even fixing bids could be considered fraud. It might be true that they could do it for less, but what they're giving you in a bid is the amount of money they want in order to perform the service.

It's similar to the idea of price gouging.

Yes. There's an old maxim in business - "a thing is worth, what that thing will bring." An uncoerced sale *is* a market price by definition.

A cold water machine 100 miles out in the desert might charge somebody $5 for a bottle of water that would cost $1 in the middle of a city. Nobody has to buy it, but if they do, nobody forced them, and in context, it might be a very good trade to pay $5 to avoid dehydration.

[DavidOdden]

Isn't this somewhat the result of the situation where the government is required to take the lowest bid (supposedly to save money)? If the government functioned (strictly in its purchasing capacity) like a regular business that can shop around, negotiate deals, etc., would there be any significant problems with the approach?

Probably. The only reason I could even imagine anyone ever wanting sealed bids would be if the government were forced to get some good or service and had to take the lowest bid. Imagine buying a car that way -- if you want a Lexus, you have to buy the cheapest Lexus you can find, and you can't say "They're all too expensive".

[DavidOdden]

What justification could there be for special laws concerning contracts with the government that don't apply to contracts in general?

Simplification. The alternative is to create a pre-contract, where in order to enter a bid, you must satisfy certain conditions (and permission to bid constitutes the consideration). A law would make those conditions uniform for all contracts, as opposed to being negotiated ad hoc for each contract. This assumes that you want to put such a condition on bidding, which I most certainly do not, so I'm just playing along with your game. If you want justification for such a condition on contracts, ask yourself why you raised the question.

If there is an agreement to not conspire on the price, then wouldn't violation of that agreement be a breach of contract? In what cases do you think that a breach of contract should be classified as fraud?

A breach of contract is not fraud, period. A conspiracy to raise or lower the price is also not a breach of contract, because there is no contract. There is an offer, not a contract -- offers and contracts are not the same thing. As I said, you could complicate the contract-forming process by first making contracts with all bidders which states that in exchange for permission to bid on X, you must promise to not discuss the price, or whatever it is you want people to not do.