COLLUSION BETWEEN PUBLIC PROCURERS AND

SUPPLIERS
IN THE CONTEXT OF JAPANS PUBLIC
PROCUREMENT:
THE ROLE OF THE RISKS OF UNSUCCESSFUL
PROCUREMENT

Satoru Tanaka
Kobe City University of Foreign Studies
and
Shuya Hayashi
Nagoya University
ABSTRACT. This paper examines the economic forces
which may lead to government assisted or facilitated bidriggings (kansei-dango) in Japans public procurement,
and reconsiders their implications. Generally, a public
official often worries about the situation where his/her
procurement project will not be successfully implemented.
Based on a very simplified theoretical consideration and
case studies on Japanese kansei-dango cases, it is
clarified that the risk of unsuccessful procurement
resulting from the experience goods nature of procured
goods and/or services which may constitute one reason
for the corruption between a government official and a
supplier. Based on this reasoning of kansei-dango, we
discuss some policy implications with respect to restraints
of this type of corruption.
1. INTRODUCTION

Generally, tenders submitted by national, local and

regional government bodies as well as other public
organizations are organized for determining contractors
and contract prices of projects through the free and fair
competition among participants in such biddings.
Restrictions of competition pertaining to the sale of
relevant goods and services by prearranged choice of the
bid winners among the bidders, so-called bid-riggings,
erode the integrity of the entire bidding system and
violates the Anti-monopoly Act (hereinafter AMA) at the
same time.
Officials of national and local governments have
sometimes been found to be involved as participants in
bid-riggings. For example, a government official in charge
of the bid may attend the meeting with representatives
from the business sectors and provide yearly targets of
order volume allocated for each enterprise. The
government officer may also issue instructions for
business entities to coordinate in achieving such targets.
Besides, in response to the request from businesses
entrepreneurs, the official may designate the winner of
bidding by suggesting the name of the prospective winner
or even leaking the planned ceiling price, which is
generally confidential and should not be disclosed. Such
bid-riggings
are
generally
called
kansei-dango
(government assisted or facilitated bid-riggings) in Japan.
In these cases, a government officials explicit direction
for rigging, its expression of intention regarding bid
winners and other forms of involvement of government
officials are observed.
In order to design the efficient public procurement
system without kansei-dango to promote market
competition among the suppliers, we need to firstly
understand the reason why Japanese bureaucrats collude
with the suppliers. By examining the testimony of

corrupted officials in some Japanese cases, the Japan Fair

Trade Commission (hereinafter the JFTC) (2015)
illustrates the motivation of public officials that may lead
to illegal actions as the follows;
1) Bureaucrats are often interested in the growth of
regional economy. In order to attain this goal, it may
be necessary to improve the ability of the suppliers
located within the region. Thus, bureaucrats may
need to be in favor of them.
2) In order to maintain the quality of procured goods,
bureaucrats may wish to delegate their procurement
to the suppliers with good reputation.
3) In actual procurement, public officials may request
the successful bidder to conduct extra operations, for
example, in the case of the occurrence of an
unexpected phenomenon or emergency. Bureaucrats
may favor the firm which has met their request
satisfactorily in the past procurement.
4) Corrupt officials may respond positively to the
potential suppliers approach in order to make
collusion more easily.
5) In practice, the details of public procurement rules
are frequently revised. In order to avoid the confusion
from the revised rule, bureaucrats may favor the
supplier with the outstanding experiences in public
procurement activities.
6) Bureaucrats may be in favor of the specific firms to
be securely offered the new job after their retirement.
Among these six factors of motivation illustrated by
the JFTC, the cases in 4) and 6) show that officials try to
pursue obviously their own gains; these are rather simple
form of corruption. Besides, in 1), 3) and 5), bureaucrats

favoritism leads to corruption by which they are more

preferable suppliers with outstanding experience or firms
located in the same region.
On the contrary, the factor under no.2) seems to focus
more on the motivation of public official to avoid the risk
of unsuccessful procurement. This factor essentially plays
very important role in the public procurement. Taking this
into account, the Law on the Promotion of Quality
Assurance in Public Works was thus enacted in 2005 in
Japan1). According to this law, scoring auctions should be
properly implemented in specific auctions of public works.
When scoring auctions are designed, it is necessary that
public procurers know the quality of procured goods
and/or services. However, this is not true in case where
quality of public procurement is not verified. As we will
mention in the following section, relatively few literatures
link this factor to the corruption between bureaucrats and
suppliers. In addition, these literatures seem not to regard
the above motivation as the reason of corruption.
The purpose of this paper is to examine the idea that
the motivation constitutes one of the main reasons of
corruption in Japanese public procurement. By focusing on
the Japanese kansei-dango cases, we clarify that the risk
of unsuccessful procurement resulting from the nature of
procured goods may facilitate corruption in the Japanese
context.
Unsuccessful
procurement
means
the
procurement of which the quality of construction work
cannot be verified and confirmed until the procurement
object is put into use, because its quality largely depends
on the technical capabilities of the contractors. In Section
2, we will review some related literatures by
concentrating on the theoretical discussions of corruption
between an auctioneer and bidders in accordance with
the auction theory. In Section 3, we will explain Japanese
laws regulating kansei-dango, and will summarize the

recent Japanese corruption cases. From the discussion, we

will eventually derive the characteristics of Japanese
cases. Next, we will explain the above idea in details and
will confirm such idea by examining the recent kanseidango case in Section 4. Section 5 concludes this paper.
2. LITERATURE
Public procurement is normally implemented by the
winner of an auction whose procedures are designed by
the
government.
Thus,
performance
of
public
procurement crucially depends on designs and procedures
of an auction, which are determined in accordance with
the natures of procured goods and/or services. In addition,
the government (public) is actually forced to delegate its
procurement activities to government officials. Since the
delegation enlarges opportunities of bureaucrats
discretion, which is based on informational asymmetry
between public and government officials, corruption at
the arena of auction may be occurred.
Recently, many papers have discussed economic
forces and the effects of corruption between a bureaucrat
and a bidder arose in the auction process from this
perspective. Compte, et.al.(2005) considers the situation
in which a public official is able to give a corrupt bidder an
opportunity to rebid her bid in exchange of bribe after all
bidders submit their bid in a simple price auction. When
the amount of bribe provided by a corrupted bidder is
restricted so that bribe competition among bidders is
imperfect, they found that corruption may facilitate
collusion in price between firms. Burguet & Perry(2007),
Arozamena & Weinschelbaum(2009) analyzes the effects
of favoritism of a corrupt official in price auction. Focusing
on the environment in which an auctioneer gives a
favored bidder the right to first refusal that permits the
latter to match the minimum bid, they found that this sort

of favoritism leads to inefficient result through a change

of bidding behaviors of honest and corrupt bidders. On
the other hand, Auriol(2006) examines the corruption by a
government official who has confidential information
about the competitiveness of the market of the procured
goods. In there, the bureaucrat can receive bribery from a
favored firm in exchange of adopting non-competitive
form of auction. With the supposition that the
implementation of competitive price auction entails fixed
costs, he shows that there is the equilibrium with capture
or extortion at intermediate market size of the procured
goods. However, the equilibrium with extortion has
extremely different implications to one with capture. The
former posts negative effects on the social welfare, whilst
the latter does not attribute to any negative effect on the
level of welfare.
Although these papers treat with the possibilities of
corruption and their effects in price auction, the authors
do not explicitly take the quality of procured goods and/or
services into account. When we recall that there were
many corruption cases over the procured goods in which
ex ante assessment of their quality is very difficult, the
focus of them may be unsatisfactory for understanding
the reasoning of corruption in Japanese public
procurement. Based on the view that the valuation on the
quality of procured goods plays an important role in the
corruption in public procurement, Laffont & Tirole(1991)
constructed an optimal mechanism model consisted of
principal (public), supervisor (official) and agent (firm),
and analyzed how the principal should design auction
taken into account of the possibility of collusion between
a supervisor and a favored firm for procuring goods whose
quality is important to her. It is showed that if the
supervisors information about quality is not verifiable, the
principal should instead adopt a symmetric auction. On
the other hand, Celentani & Ganuza(2002) and Burguet &

Che(2004) consider the effects of corruption in the

framework of scoring auction. They supposed the
situation in which a corrupt bureaucrat can manipulate
quality component of the score in exchange of bribe by
the bidders. In accordance with this framework, they
showed that the corruption leads to inefficient results in
the scoring auction.
These researches assume that a public official has
sufficient ability of evaluating the quality of procured
goods. However, as mentioned in the next subsection, in
the case of Japanese public procurement, this assumption
may be inadequate for understanding the economic
forces facilitating corruption between a government
official and a bidder.
3. REGULATIONS AND CHARACTERISTICS OF
JAPANESE KANSEI-DANGO
3-1. Regulatory Framework of kansei-dango in
public procurement
The attempt toward the revised requirements of law
regarding kansei-dango was firstly prompted by the JFTCs
a cease and desist order issued in May 2000 to combat a
bid-rigging cases for a the local government projects 2). In
that case, the evidence was found that the project owner
has an intention to nominate the bid winner, and the JFTC
thereby issued a request of remedies to the local
government in question. Spurred by this incident,
government officials involvement in such bids known as
kansei-dango drew strong criticism from the society. While
penalty may be imposed on business enterprises involved
in such bid-riggings, there is no sanction on the side of
officials who induce bid-riggings. This imbalance brought
about a sense of unfairness toward service contractors.

For this reason, the government began to study in light

of preventing government officials from committing such
involvements, the legislation of the Act concerning
Elimination and Prevention of Involvement in Bid Riggings
was thus promulgated in January 2003.
Based on the law which aims to eliminate and prevent
the involvement of government officials in bid-rigging
schemes, the JFTC may require the head of organizations
to offer the concerned bids by making corrective
measures to eliminate the involvement of government
officials. After receiving the request from the JFTC, the
head of relevant ministries and other government
organizations have to investigate whether there is
evidence substantiating disciplinary punishment on those
officials involving in bid-riggings. Cooperation and
coordination among relevant administrative organizations
are also required by the law.
This Act provides measures to eliminate and prevent
the involvement of bid-rigging. The Act also includes the
demand of the Fair Trade Commission over the Heads of
Ministries and Agencies regarding (i) an improvement
measures ,which are necessary to eliminate involvement
in bid rigging, (ii) the compensation claimed measures
which is targeted on those employees involving in the
bid-rigging, (iii) investigation to take actions against the
involved employees, (iv) coordination among the
administrative organs and (v) punishments to be imposed
on involved employees whose act is harmful to the
fairness of bidding.
The term "bid-rigging" in this Act shall means the act
where local governments or specified corporations
(hereinafter referred to as "government") unlawfully
agrees in the sale and purchase, lease or the contract
with the counter party in an auction or other competitive

means (hereinafter referred to as "bidding"). Such act

violates the Article 3 or Article 8, paragraph 1, item 1 of
the AMA (Act No. 54 of 1947), through such practices that
an entrepreneur wishes to participate in the bidding
decided in conjunction with other entrepreneurs to
nominate the successful bidder or the successful bid
price, or in the case where the trade association assigned
an entrepreneur wishing to participate in the bidding to do
engage in the prior mentioned conduct.
The term "involvement in bid rigging" in this Act shall
mean the involvement in bid rigging by the employees of
national or local governments, or directors or employees
of specified corporations (hereafter "the employees"), and
falling under any of these circumstances.
(i) Having an entrepreneur or trade association engages
in bid-rigging.
(ii) Nomination of the counter party of the contract in
advance, or indication or suggestion in advance of
wishes to the effect that a specified person be the
counter party of the contract.
(iii)Out of various data concerning bidding or contract,
indication or suggestion of information held in
confidential files to a specified entrepreneur or trade
association which may lead to the creation of bidrigging conspiracies by the specified entrepreneur or
trade association.
(iv) In connection with a specific bid rigging, aiding bid
rigging, nominating a specific person to participate in
a bid, or by any other methods with the express or
implicit request of an entrepreneur, trade association,
or any other entities or by voluntarily approaching
these persons, for the purpose of facilitating in bidrigging in breach of such employee's duties.

Penal Code Act No. 45 of April 24, 1907 also sets

out Obstruction of Auctions. Article 96-3(1) of this Act
stipulates that a person who use of fraudulent means or
force commits an act which impairs the fairness of a
public auction or bid, shall be imprisoned not more than 2
years or shall be subjected to a fine of not more than
2,500,000 yen. Public involvement in bid rigging is
deemed as fraudulent means which impairs the fairness
of a public auction. After the recognition of an
involvement of bid-rigging via the investigation, the JFTC
may demand the Heads of Ministries and Agencies to
implement improvement measures on the administration
of bidding and contracts that are necessary for
eliminating the involvement of bid-rigging. Police and
prosecutors may investigate and prosecute criminal cases
of kansei-dango at any time.
We shall address the first comprehensive amendments
of the AMA in April 2005. These amendments took effect
on January 4th, 2016 with an increase in the rate of
surcharge imposed on violators of the Act and the
application of the higher rate to entrepreneurs with a
repeated history of violations as well as introducing the
criminal investigation powers. Those amendments aim to
regulate AMA violations in the more active in the stricter
manner. On the other hand, the amendments provide a
motivation for terminating violations at the earliest
opportunity. For example, a leniency program was
introduced by taking into account the models of the
United States, the European Union and other developed
countries. Under this program, entrepreneurs reporting
their violations to the JFTC are able to enjoy the full
statutory immunity or the reduction of
imposed
surcharges. New systems have been introduced by these
amendments in order to effectively and adequately create
deterrence effect on the AMA violations. For revitalizing
the economy and furthering consumer interests through

10

the free and fair competition, we are fully committed to

continue the promotion of competition policy through
rigorous enforcing the AMA as well as addressing stateimposed or facilitated restraints.
3-2. Characteristics of Japanese Kansei-dango
cases
Table 1 shows the Japanese corruption cases which
JFTC exposed as violation of the Act concerning
Elimination and Prevention of Involvement in Bid Rigging
after the enforcement of this law. On the other hand, Table
2 shows similar corruption cases which were prosecuted
by police since 2008. Police pays attention to an illegal
action over the implement of public tendering, whilst the
JFTC concentrates more on the cases which are related to
collusions between firms. According to this different
characteristics, the number of cases prosecuted by police
is relatively large.
<Table 1 and Table 2>
Apart from the number of the cases prosecuted, these
tables illustrate major characteristics of corruption
between bureaucrat(s) and firm(s) in the Japanese public
procurement. First, many corruptions arose in the public
works. In fact, according to the total 42 cases represented
in Table 1 and 2, 29 cases (69%) were occurred in the
public works. As Soreide (2002) pointed out that the
complexity of the product procured by government is an
important factor to corruption. In the public works, this
complexity can be interpreted as the disability of
government confirming the quality of procured products
before the implementation of procurement. We will
discuss how this interpretation plays an important role in
explaining corruption in the Japanese public procurement.

11

Second, illegal action in many Japanese corruption

cases is a leakage of secret tendering information.
According to the Table 2, in almost all of the cases
prosecuted by police, government official(s) leaks the
secrecy (eg. the reserve price) to a bidder upon the
latters request. Moreover, we observe from Table 1 that
similar leakage also occurs in half of the cases exposed by
the JFTC. This implies that this sort illegal action
contributes to an unlawful gains of both parties (a
bureaucrat and a bidder).
Third, in many Japanese cases, illegal action was
carried out without pecuniary bribe providing to a
government official. Table 2 shows whether pecuniary
bribe was verified in the case prosecuted by polices.
Interestingly, in 18 cases (accounted for 62%), a corrupt
official did not receive any bribe.
Among these three characteristics, we shall mainly
concentrate on first characteristics because this factor
constitutes as an incentive of the Japanese bureaucrat to
corrupt. Next, we shall consider why this is the case by
scrutinizing numerical examples.
4. UNSUCCESSFUL PROCUREMENT RESULTED FROM
EXPERIENCE GOODS
4-1. Economic Forces facilitating corruption in the
Japanese public procurement
As an observation in Section 2, corruptions by
bureaucrats in auction processes often exposes in the
goods and/or services whose quality is not able to confirm
ex ante by government officials, especially in the case
where we can only identify the performance of public
works after the completion of the project. As Nelson(1970)
pointed out, this type of goods are called experience
goods. By focusing on the nature of procured goods to

12

investigate the incentive to collude by government

officials, it is necessary to take the following factors into
account. First, reflecting the nature of experience
goods, a bureaucrat does not have ex ante information
about the quality of procured goods. Second, if the quality
of the procured goods is poor, benefits of a bureaucrat
may be drastically reduced. Although this second point is
obvious for the government or benevolent bureaucrat, it
may not be obvious for opportunistic official.
Nevertheless, we can easily imagine that the bureaucrat
procuring goods whose quality is poor actually faces
various difficulties in which he or she may be forced to
bear the responsibility for his or her failure of
procurement, and may also get behind his/her colleagues
in terms of promotion. In addition, with a mind to
Japanese construction industry, we examine the situation
in which government official has less information about
the quality of procured goods than bidders (construction
firms). More concretely, while construction firms know the
quality of procured goods by the contractor, a bureaucrat
can predict only the quality of the goods produced by the
favored firm (she can predict the quality by other firm
only probabilistically).
Based on these presumptions, consider the following
situation. Suppose that a government (or benevolent
bureaucrat) is planning to procure an experience good.
Although the quality of this goods is confirmed by her only
after the completion of the procurement, she is concerned
to procure the goods whose quality is satisfied with the
prescribed level q*. Reflecting this, when she procures the
goods with q*, her benefit is large (e.g. 250), but if the
quality of the goods is below than this level, her benefit is
drastically reduced (e.g. 120). Two types of firms (honest
firm (firm 1) and opportunistic firm (firm 2)) can
potentially supply the goods. Firm 1 always produces
quality goods, but firm 2 supplies the goods that is not

13

satisfied with the quality level q* if he is dishonest

supplier although he can produce quality goods in the
case of honest supplier. Facing the risk of procuring poor
goods, government favors firm 1. We assume that the
probability which firm 2 is honest supplier is 1/2.
Moreover, it is assumed that while firm 1s cost of
supplying the goods is 100, firm 2s cost in the case of
honest (dishonest) supplier is 100+ (80).
Let us consider the following game-theoretic
framework under this environment. At first stage the
government selects auction form; simple price auction or
non-competitive auction. It is assumed that she is
normally forced to adopt the former, but that she can
choose the latter in exchange of bribe by favored firm. In
addition, she adopts the auction form which yields larger
net benefit (including bribe). At second stage selected
auction is conducted. When the government adopts price
auction, the winning bidder is awarded to the contract.
Especially, due to the nature of experience goods, if firm2
is a dishonest supplier he can win the auction telling that
his product will be satisfied with prescribed quality level.
On the other hand, when the non-competitive auction is
selected, the contract is awarded to firm 1 (in exchange of
his bribe). After the contractor is determined, the goods
are produced and are delivered to the government. When
the goods are produced by dishonest type of firm 2, the
quality of them becomes poor. We assume that if this
situation is occurred, the government is forced to drop
without protest perhaps due to the difficulties of
verification of the quality3).
First, consider the result of price auction at second
stage. When firm 2 is an honest type, firm 1 can win the
auction by setting his bidding price to 100. In this case,
while the government obtains net benefit of 150 (=250100), the profit of firm 1 is 0. On the other hand, if a

14

dishonest type of firm 2 participates in the auction, its

winner becomes firm 2 by setting his bid to 100-.
Because he supplies the poor goods at lower cost (80), his
profit is 20. But, the government gets only net benefit of
20 (=120-100) in this case. Thus, her expected net
benefit
of
adopting
price
auction
is
85
(=1501/2+201/2). Next, let us examine the result of
non-competitive auction. Since this auction lacks the
competition among bidders, the contractor (firm 1) can
raise his bid to maximum price (250). So, in this case
while the government obtains no benefit, the profit of firm
1 is 150 (=250-100).
However, firm 1 knows that price auction is adopted if
he gives no bribe to the government, so that his expected
profit is 0. Thus, there is a motivation of giving bribe and
asking her to select non-competitive auction at first stage.
On the other hand, the government has an incentive to
receive his bribe and choose non-competitive auction if
she obtain net benefit including bribe larger than 85.
Since joint profit from conducting non-competitive auction
is larger than 85, it is possible to support a corruption
between the government and its favored firm successfully.
This numerical analysis tells us the reason why
Japanese bureaucrats sometimes collude with the
suppliers. Obviously, the risk of unsuccessful completion
of the project which bureaucrats may face in conducting
procurement contributes to create an incentive for
bureaucrats and suppliers to collude each other. In fact,
as the numerical example suggests us, when the public
official procures the goods whose quality is shady, her
benefit is drastically decreased. Notice that this risk is
created by the following two elements. One element is
that the procured goods is experience goods. Due to this
nature, government officials cannot exclude the possibility
of procuring poor goods. Other element is the asymmetry

15

of information among officials and suppliers which they

have about the quality of goods. This means that while
the firms can predict the quality of procured goods, public
officials do not know it. As the result, an opportunistic firm
(dishonest type of firm 2) can pretend that he is honest
and is able to supply the quality goods at reasonable
price. This obviously means that the risk is revealed.
Although this reasoning, we should notice that the
favored firm (firm 1) has monopolistic position in the
numerical example. In fact, high profits which favored firm
acquire in the case of bribery enable to support the
collusion. Thus, it is necessary for the favored firms to
obtain high profit for supporting corruption. This suggests
that collusion among suppliers or market imperfection
may be prerequisite for corruption.
4-2. Case studies in the application of the Act
concerning
Elimination
and
Prevention
of
Involvement in Bid Riggings
We would like to give you an example of application of
the Act concerning Elimination and Prevention of
Involvement in Bid Riggings. This is a most recent case
regarding bidding for snow-melting equipment works for
Hokuriku Shinkansen4).

(1) Outline of the case

The JFTC issued the cease and desist orders and the
surcharge payment orders to the 11 companies that had
participated in bidding for snow-melting equipment works
ordered by the Japan Railway Construction, Transportation
and Technology Agency, finding that, on September 14
2011, the 11 companies substantially restrained
competition in the field of snow-melting equipment works

16

for Hokuriku Shinkansen (Japanese bullet train) by

designating successful bidders and managing to have the
designated successful bidders with the bidding. In this
case, the 11 companies were in violation of Article 3
(prohibition of unreasonable restraint of trade) of the
AMA. The total amount of the surcharge to be paid is
approximately 1.03 billion yen. In the hearing procedure,
the JFTC notified the 11 companies of the contents of the
proposed orders in writing and provided them with
opportunities to view and copy the evidence which
became a basis for the orders and to submit their opinions
and evidence to the JFTC. The orders have been issued
after the JFTC took into consideration the opinions and the
evidence submitted. A recipient dissatisfied with the
orders appealed to the Tokyo District Court 5).
(2) Essence of the case
The new allegations over bid-rigging on Shinkansenrelated engineering work mean that competitive bidding
on infrastructure improvement projects essential for the
safety of bullet train services was derailed through a
collusive relationship between entities in the public and
private sectors. The cost of the projects is to be covered
by such resources as national government subsidies and
contributions from local governments affected by these
plans. If prices tendered for construction projects are
exorbitant due to bid-rigging, the corporations involved in
the scheme will reap unlawful profits, thus requiring
excessive public expenditures.
It will be particularly disconcerting if the case is found
to involve collusive bidding at the initiative of such a
government-affiliated institution as JRTT. However, this
seems likely as bidding on the projects included more
than one case in which the price of a successful bid on a
construction project was equivalent to 99 percent or more

17

of the price anticipated by JRTT. It is apparent that the

prices must have been leaked to potential contractors as
the bids on the projects were accepted at prices nearly
equal to those JRTT anticipated.
Another probable factor behind the latest case is that
JRTT wanted to avoid unsuccessful procurement
(unsmooth progress in the bidding process) so it could
complete the construction projects in time for the opening
of the Nagano-Kanazawa route. If no bidder had won a
contract for a project, it would have taken about two
months for a new bidding session to take place. This
would have led to delays in the JRTT projects. If JRTT put
its own convenience ahead of everything else by
becoming involved in bid-rigging and accommodating
bidders interests, it would undermine the essential nature
of competitive bidding. It would also impair peoples trust
in public works projects. In December 2006, the Public
Sector Bid-Rigging Prevention Law was revised to impose
criminal penalties on public service employees and
others. The law would apply to employees at JRTT, an
institution wholly financed by the government. JRTTs
undertakings include construction work on new
Shinkansen lines in Hokkaido and Kyushu in addition to
the Hokuriku Shinkansen. Prompt measures should be
taken to determine whether there were any suspicions
about bidding for projects on these lines. The latest case
has highlighted the depth of industry-wide collusion. The
targets of this investigation included a large corporation
that has expertise in installing snow-melting equipment.
The latest bid-rigging case is not an isolated one in the
engineering industry. In 2006, action was taken in a case
involving an order placed by the now-defunct Defense
Facilities Administration Agency for air-conditioning
equipment installation work.
5. CONCLUDING REMARKS

18

This paper suggests that the risk of unsuccessful

procurement resulting from experience goods nature of
procured goods may facilitate kansei-dango in Japanese
public procurement. On the one hand, simple price
auction may lead to unsuccessful procurement and
decrease social surplus in the situation described in
Section 4. When this is the case, a non-competitive style
of procurement method may be useful. However, in Japan,
because many collusion and corruption cases were
uncovered since 1990s, non-competitive auction is rarely
adopted in practice. The above examination may urge us
to reconsider adoption of non-competitive auction.
On the other hand, it should be noted that Japanese
kansei-dango is supported by collusion among suppliers
or market imperfection. In order to increase the
awareness of the business sector, it is very important for
government officials and the public to take measures to
eliminate government-assisted bid rigging and restore the
fairness of public auction. It is also very important to
enhance the transparency of demands issued by the JFTC
to central government agencies, public corporations or
local governments as improvement measures aiming to
prevent the recurrence of government-assisted bid
rigging, as well as that of the specific improvement
measures implemented by such government-related
bodies and organizations.
From a competition policy perspective, the JFTC has
been implementing competition law with its emphasis on
the active creation of a competitive business
environment, in order to promote vitalization of an
economy based on free and fair competition, as well as to
further consumer interests. In order to create competitive
business environment, it is becoming increasingly
important to address the creation and implementation of

19

states anti-competitive regulations as well as to remove

other state-imposed or facilitated restraints.

<Table 1> Kansei-Dango Cases Prosecuted by JFTC

20

Source: JFTC (2015)

<Note> Action in the table shows the type of illegal action
prohibited in Article 2(5) of Japanese Kansei-dango
Preventing Act. Each action corresponds to the following
meaning respectively;
Action 1: Instruction of forming bid-rigging,
Action 2: Indication of bureaucrats wishes of the result
of tendering to a specified firm,
Action 3: Leakage of confidential information about
tendering,
Action 4: Actions of supporting bid-rigging.

21

<Table 2> Kansei-Dango Cases Prosecuted by Police

Source: JFTC (2015)

<Note> Some informations in the table is supplemented
by the articles in Nihon-Keizai Shimbun.

NOTES

22

1) The Law on Promoting Quality Assurance in Public

Works states that the quality of public works must be
secured by selecting appropriate methods among
various tendering and contracting methods in
accordance with the nature of the works and the
actual conditions in the area, while giving
consideration to the capabilities and formation of the
commissioning entity of the public works. In assuring
the quality in public works, consideration should be
given to proper tendering and contracting, such as the
exclusion of a construction business operator that is
not qualified as a contractor, by securing the
transparency of the tendering and contracting process
and the content of a contract, and the fairness in
tender, by thoroughly abolishing involvement or other
improper actions, such as bid-rigging or tendering bidrigging, by preventing the conclusion of a contract for
public works the proper implementation of which
cannot be expected depending on the contract fee
provided for therein, and by securing the proper
implementation of contracted public works.
2)

The JFTC Recommendation against suppliers of

agricultural construction works procured by Hokkaido
Prefecture. May 15. 2000.

3) Some readers may argue that this assumption is

problematic because government can recover the loss
resulted from poor quality of procured goods by suing
the dishonest firm in court. Thus, this assumption
implies imperfect enforcement of compensation
system for damages. We believe that actual public
procurement faces this type of imperfection.
Theoretically, one may interpret that the nature of
procured goods is not experience goods but
credence goods. See Dulleck & Kerschbamer(2006)
for the economic implications of credence goods.

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4) The JFTC Issued Cease and Desist Orders and

Surcharge Payment Orders to the Participants in
Bidding for Snow-Melting Equipment Works for
Hokuriku Shinkansen Ordered by the Japan Railway
Construction, Transportation and Technology Agency
October 9, 2015, Japan Fair Trade Commission.
5) The JFTC Filed a Criminal Accusation on Bid-Rigging
Concerning Snow-Melting Equipment Engineering
Works for Hokuriku Shinkansen Ordered by the Japan
Railway Construction, Transport and Technology
Agency, Mar. 4, 2014.
(http://www.jftc.go.jp/en/pressreleases/yearly2014/March/140304.html).
ACKNOWLEDGMENT
This paper was supported by the grant from Japan
Society for the Promotion of Science (JSPS: Grants-in-Aid
for Scientific Research, Scientific Research (C) 26380338.
The author appreciates this financial support for this
paper.
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