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Sequential procurement auctions with risk-averse suppliers

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  • Takeshi Nishimura

Abstract

We compare two procurement mechanisms, bundling and unbundling, in a two-stage auction model with risk-averse suppliers. The mechanisms differ in that the two tasks of investment and production are procured through a single auction or two sequential auctions. Suppliers’ production costs are affected by two risk factors, aggregate risk and idiosyncratic risk, as well as by the cost-reducing investment. We show that the bundling mechanism is optimal for a buyer and socially desirable if the aggregate risk is below certain thresholds. The result may not hold true for idiosyncratic risk. Copyright Springer-Verlag Wien 2014

Suggested Citation

  • Takeshi Nishimura, 2014. "Sequential procurement auctions with risk-averse suppliers," Journal of Economics, Springer, vol. 113(3), pages 229-252, November.
    • Handle: RePEc:kap:jeczfn:v:113:y:2014:i:3:p:229-252
    DOI: 10.1007/s00712-013-0381-1
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    References listed on IDEAS

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    1. Hoppe, Eva I. & Kusterer, David J. & Schmitz, Patrick W., 2013. "Public–private partnerships versus traditional procurement: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 145-166.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Sequential auctions; Bundling; Risk sharing; Procurement; Public-private partnerships; D44; D81; D86; H11; H57; L33;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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