Sequential Procurement with Limited Commitment

We analyze the problem of a buyer who purchases a long-term project from one of several suppliers. A changing state of the world influences the costs of the suppliers. Complete contracts conditioning on all future realizations of the state are infeasible. We show that contractual incompleteness comes without a cost. The buyer achieves the same surplus with complete and incomplete contracts. The key insight is that the allocation prescribed by optimal complete contracts is sequentially optimal with incomplete contracts if the buyer does not receive too much information ex-interim. We show that the English auction restricts the information optimally.

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“…This renders implementation more challenging. We consider an instance of this problem in Fugger et al (2019).…”

Section: Discussionmentioning

confidence: 99%

“…Thus, it becomes crucial to design the mechanism in such a way that it reveals the right amount of information. Fugger et al (2019) consider sequential procurement with private cost shocks in a two-type model. Supplier's costs change between periods.…”

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confidence: 99%

Incomplete Contracts in Dynamic Procurement

Gretschko

Pollrich

2019

SSRN Journal

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“…For non-standardized goods, such as complex construction or infrastructure projects, the benefits of competition are less straightforward. A distinguishing feature of procurement tenders, as opposed to sales auctions, is that the bidding process represents the beginning rather than the end of the relationship (Fugger, Gretschko and Pollrich 2019). Procurers often rely on ex-post incentives to mitigate the risk of supplier non-performance.…”

Section: Introductionmentioning

confidence: 99%

Trust and Trustworthiness in Procurement Contracts with Retainage

2023

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In complex procurement projects, it is difficult to write enforceable contracts that condition price upon quality. Supplier nonperformance becomes an acute risk, particularly when there is intense competition for the contract. An established incentive mechanism used to mitigate the problem of supplier nonperformance is retainage, in which the buyer sets aside a portion of the purchase price. After project completion, the buyer determines the amount of retainage that is released to the seller, considering any defects that arise. Although generally a feasible contract form to implement, the practical difficulties in assessing completion introduce a moral hazard for the buyer. We develop a structurally new game and experimental design to offer managerial insights on how retainage principles mediate trust and trustworthiness in competitive procurement settings with moral hazard. The experimental results suggest that if trust in the procurement relationship is strong enough, then retainage can mitigate the seller-side moral hazard problem and substitute for reputation in a fragmented supply chain at the cost of inflated tender prices. In high retainage structures, there is a tradeoff between trade efficiency and supplier participation in request for bids. We further develop a model of fair payment norms and offer managerial insights on how to design the retainage mechanism, conditional on prevailing levels of trust and beliefs about fairness. This paper was accepted by Vishal Gaur, operations management.

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“…Since Coase (1972) and Bulow (1982) it has been known that a monopolist who lacks commitment power may not be able to exploit his position, as forward-looking buyers would simply wait and get a better price in the future. The literature on mechanism design with limited commitment has taken this as a starting point and studied various ways how the principal can at least partially overcome this problem Bester and Strausz (2001); Vartiainen (2013); Gerardi, Hörner and Maestri (2014); Deb and Said (2015); Doval and Skreta (2019) ;Fugger, Gretschko and Pollrich (2019); Liu, Mierendorff, Shi and Zhong (2019); Doval and Skreta (2022). In our model, the seller cannot be relied upon to report her future cost truthfully and thus needs to ensure that an ex-ante contract is designed in a way that is incentive-compatible not just for the buyer, but for her future self.…”

Section: Introductionmentioning

confidence: 99%