Procurement Auctions with Renegotiation and Wealth Constraints

Chang, Wei-Shiun and Salmon, Timothy C. and Saral, Krista Jabs (2013): Procurement Auctions with Renegotiation and Wealth Constraints.

Abstract

Renegotiation is a common practice in procurement auctions which allows for post-auction price adjustments and is nominally intended to deal with the problem that sellers might underestimate the eventual costs of a project during the auction. Using a combination of theory and experiments, we examine the effectiveness of renegotiation at solving this problem. Our findings demonstrate that renegotiation is rarely successful at solving the problem of sellers misestimating costs. The primary effect of allowing renegotiation is that it advantages sellers who possess a credible commitment of default should they have underbid the project. Renegotiation allows these weaker types of sellers to win more often and it also allows them to leverage their commitment of default into higher prices in renegotiation from a buyer.

• Item Type: MPRA Paper
• Language: English
• Keywords: Procurement auctions, renegotiation, bankruptcy, default, economic experiments
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D44 - Auctions; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D47 - Market Design; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design

References

Bajari, P. and A. Hortacsu (2003). Winner's Curse, Reserve Prices and Endogenous Entry: Empirical Insights from eBay Auctions. Rand Journal of Economics 3 (2), 329-355.

Bajari, P., S. Houghton, and S. Tadelis (2011). Bidding for incomplete contracts: An empirical analysis of adaption costs. Working Paper.

Calveras, A., J.-J. Ganuza, and E. Hauk (2004). Wild bids. gambling for resurrection in procurement contracts. Journal of Regulatory Economics 26 (1), 41-68.

Chang, W.-S., B. Chen, and T. C. Salmon (2012). An investigation of the average bid mechanism for procurement auctions. Working Paper.

Chen, J., L. Xu, and A.Whinston (2010). Managing project failure risk through contingent contracts in procurement auctions. Decision Analysis 7 (1), 23-39.

Decarolis, F. (2011). When the highest bidder loses the auction: Theory and evidence from public procurement. Working Paper University of Wisconsin.

Decarolis, F. (2012). Awarding price, contract performance and bids screening: Evidence from procurement auctions. Working Paper, U Wisconsin.

Gil, R. and J.-M. Oudot (2009). Competitive bidding, renegotiation and relational contracting: Evidence from french defense. Working Paper.

Goeree, J. and T. Offerman (2002). Efficiency in auctions with private and common values: An experimental study. American Economic Review 92 (3), 625-643.

Goeree, J. K. and T. O¤erman (2003). Competitive Bidding in Auctions with Private and Common Values. Economic Journal 113 (489), 598-613.

Kagel, J. H. and D. Levin (1986). The winner's curse and public information in common value auctions. American Economic Review 76 (5), 894-920.

Kagel, J. H. and J.-F. Richard (2001). Super-experienced bidders in first-price common-value auctions: Rules of thumb, nash equilibrium bidding, and the winner's curse. The Review of Economics and Statistics 83 (3), 408-419.

Milgrom, P. R. and R. J. Weber (1982). A Theory of Auctions and Competitive Bidding. Econometrica 50 (5), 1089-1122.

Parlane, S. (2003). Procurement contracts under limited liability. The Economic and Social Review 34 (1), 1-21.

Roelofs, M. R. (2002). Common value auctions with default: An experimental approach. Experimental Economics 5 (3), 233-252.

Waehrer, K. (1995). A model of auction contracts with liquidated damages. Journal of Economic Theory 67 (2), 531-555.

Wang, R. (2000). Bidding and renegotiation in procurement auctions. European Economic Review 44 (8), 1577-1597.