Bid-rigging cartels need a credible external enforcer to police defectors

Evidence

One common method of collusion works like this: firms A, B, C, and so on agree that, say, B should obtain the contract; the others then submit artificially high bids to ensure that B’s offer is the lowest. There are certain prerequisites if a deal of this kind is to work. First, only firms in the cartel can participate; free riders must be excluded. Next, firms A and C and the rest require guarantees that B will return the favor in the future. Builders therefore keep careful records of who obtained which contract (1-3, 1-4). In rum, B must be confident that the other firms will not submit a competitive bid at the last minute. The ideal strategy is to collude without the assistance of mafiosi and pay no protection money, but this scheme works only so Jong as everybody behaves. Once, in the late 1970s, when two firms suddenly defected and went after a forbidden contract, “the man of respect was called in and persuaded them to withdraw” (I-3). — Diego Gambetta, The Sicilian Mafia The Business of…, 569

Categorization

• XREF: Directly illustrates Gambetta’s private-protection market and Milgrom et al.’s private judge model: the Mafia supplies the third-party enforcement that a state-legitimacy gap requires. Also a Schelling-style commitment mechanism.
• ADDENDUM: Connects to ‘On Sacrifice’ theme of third-party authority figures—a different register but the same logic of an external enforcer binding agreements.