Procurement under public scrutiny: auctions versus negotiations

Abstract

We compare two commonly used mechanisms in public procurement: auctions and negotiations. The execution of the procurement mechanism is delegated to an agent of the buyer. The agent has private information about the buyer's preferences and may collude with one of the sellers. We provide a general characterization of both mechanisms based on public scrutiny requirements and show—contrary to conventional wisdom—that an intransparent negotiation always yields higher social surplus than a transparent auction. Moreover, there exists a lower bound on the number of sellers such that the negotiation also generates a higher buyer surplus.

Auctions versus negotiations: the effects of inefficient renegotiation

“…In fact, this is the reason why there are legal rules in many countries that require competitive tendering in public procurement. However, in a recent article, Gretschko and Wambach (2016) show that an auction may be more prone to favoritism than negotiations. 29 It would be very interesting to analyze second-best procurement mechanisms if some but not all characteristics of possible design improvements can be specified in a scoring function, and how these auctions compare to multistage mechanisms that combine an innovation contest, in which a fixed prize is given for the best design proposal (as in architectural competitions) with a subsequent price-only auction.…”

“…In fact, this is the reason why there are legal rules in many countries that require competitive tendering in public procurement. However, in a recent article, Gretschko and Wambach () show that an auction may be more prone to favoritism than negotiations…”

“…In Gretschko and Wambach (), the buyer has to delegate the procurement process to an agent, who may bias the auction rules or the negotiation outcome in order to favor his most preferred seller. The authors show that biasing the auction rules may be more harmful than biasing the negotiation outcome.…”

Inducing Variety: A Theory of Innovation Contests

“…However, her analysis does not speak to optimal design and the role of bonus tournaments. 35 Gretschko and Wambach (2016) analyze the design of mechanisms for public procurement when exogenously differentiated suppliers offer different specifications, and the buyer does not know her preferences. The modeling of buyer utility is similar to ours.…”

Imitation Perfection A Simple Rule to Prevent Discrimination in Procurement

“…Even though we do not explicitly model an agent of the buyer, our model could easily be extended by the introduction of an agent who, in exchange for a bribe, would bend the rules of the mechanism in the most favorable way that is consistent with the procurement regulations. Contrary to Gretschko and Wambach (2016), we do not focus on the ability of the agent to manipulate the quality assessment of the buyer but rather on the ability of an agent to design procurement mechanisms. To the best of our knowledge, our article is therefore the first to investigate the design of procurement regulations in the presence of corruption and manipulation of the rules of the mechanism.…”