Auctions versus negotiations: the effects of inefficient renegotiation

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: For the procurement of complex goods the early exchange of information is important to avoid costly renegotiation. If the buyer can specify the main characteristics of possible design improvements in a complete contingent contract, a scoring auction implements the efficient allocation. If this is not feasible, the buyer must choose between a price-only auction (discouraging early information exchange) and bilateral negotiations with a preselected seller (reducing competition). Bilateral negotiations are superior if potential design improvements are important, if renegotiation is particularly costly, and if the buyer's bargaining position is strong. Moreover, negotiations provide stronger incentives for sellers to investigate design improvements. JEL classification numbers: D03; D82; D83; H57. Terms of use: Documents in

Procurement with Unforeseen Contingencies

“…A behavioral foundation based on loss aversion for inefficient renegotiation is developed by Herweg and Schmidt (2015). Other contributions like Bajari and Tadelis (2001) and Herweg and Schmidt (2017) start out from the assumption that renegotiation is costly and investigate the implications. Bajari and Tadelis (2001) compare fixed-price to cost-plus contracts and show that standardized goods should be procured by fixed-price contracts that give strong cost-saving incentives to sellers, while complex goods should be procured by cost-plus contracts in order to avoid costly renegotiation.…”

“…Bajari and Tadelis (2001) compare fixed-price to cost-plus contracts and show that standardized goods should be procured by fixed-price contracts that give strong cost-saving incentives to sellers, while complex goods should be procured by cost-plus contracts in order to avoid costly renegotiation. Herweg and Schmidt (2017) compare price-only auctions to bilateral negotiations. They show that negotiation with one selected seller may outperform an auction because the auction induces sellers to conceal private information about design improvements which gives rise to inefficient renegotiation.…”

Sequential Procurement with Limited Commitment

“…A classic strand of the literature investigates moral hazard as the main source of renegotiation (Fudenberg and Tirole, 1990 or Herweg and Schmidt, 2015 for a more recent contribution). Another line of reasoning identifies design flaws as a source of renegotiation (Herweg and Schmidt, 2017;Herweg and Schwarz, 2018). Suppliers have private information about potential design flaws of the procurement project and leverage this information to capture additional rents during the project.…”

Optimal Cost Overruns: Procurement Auctions With Renegotiation

“…Finally, costly renegotiation of incomplete procurement contracts is analyzed by Bajari and Tadelis (2001) and Herweg and Schmidt (2017). The former paper analyzes when fixed-price contracts outperform cost-plus contracts, whereas the latter one derives conditions so that bilateral negotiations outperform procurement auctions.…”

“…If the procurer can specify a maximum bid R-that is, only price bids p ≤ R are allowed in the second-price auction-and this maximum bid is publicly announced before suppliers place their bids, it is still optimal for the procurer to specify x = x L initially(Herweg and Schwarz, 2016).…”