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Wild Bids. Gambling for Resurrection in Procurement Contracts

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  • Aleix Calveras

    ()

  • Juan-Jose Ganuza

    ()

  • Esther Hauk

    ()

Abstract

This paper analyses the problem of abnormally low tenders in the procurement process. Limited liability causes firms in a bad financial situation to bid more aggressively than financially healthy firms in the procurement auction. Therefore, it is likely that the winning firm is a firm in financial difficulties with a high risk of bankruptcy. The paper focuses on the regulatory practice of surety bonds to face this problem. We show that the use of surety bonds reduces and sometimes eliminates the problem of abnormally low tenders. We provide a characterization of the optimal surety bond and show that the U.S. practice of requiring that surety bonds cover over 100% of the contract price can be excessive, implying overinsurance to the problem of abnormally low tenders.

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Bibliographic Info

Article provided by Springer in its journal Journal of Regulatory Economics.

Volume (Year): 26 (2004)
Issue (Month): 1 (07)
Pages: 41-68

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Handle: RePEc:kap:regeco:v:26:y:2004:i:1:p:41-68

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Web page: http://www.springerlink.com/link.asp?id=100298

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  1. Juan J. Ganuza, 1998. "Competition and cost overruns. Optimal misspecification of procurement contracts," Economics Working Papers 471, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2002.
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Cited by:
  1. Alessandro Bucciol & Ottorino Chillemi & Giacomo Palazzi, 2011. "Cost Overrun and Auction Format in Public Works," Working Papers 17/2011, University of Verona, Department of Economics.
  2. Roberto Burguet & Juan-José Ganuza & Esther Hauk, 2009. "Limited Liability and Mechanism Design in Procurement," Working Papers 383, Barcelona Graduate School of Economics.
  3. Chang, Wei-Shiun & Salmon, Timothy C. & Saral, Krista Jabs, 2013. "Procurement Auctions with Renegotiation and Wealth Constraints," MPRA Paper 50137, University Library of Munich, Germany.
  4. Gunnar Alexandersson & Staffan Hultén, 2006. "Predatory bidding in competitive tenders: A Swedish case study," European Journal of Law and Economics, Springer, vol. 22(1), pages 73-94, July.
  5. Kenju Akai & Shigehiro Serizawa, 2009. "Auctions for Public Construction with Corner-cutting," ISER Discussion Paper 0740r, Institute of Social and Economic Research, Osaka University, revised Jul 2010.
  6. Pablo F. Beker & Ángel Hernando-Veciana, 2011. "Persistent markups in bidding markets with financial constraints," Economics Working Papers we1133, Universidad Carlos III, Departamento de Economía.
  7. Bucciol, Alessandro & Chillemi, Ottorino & Palazzi, Giacomo, 2013. "Cost overrun and auction format in small size public works," European Journal of Political Economy, Elsevier, vol. 30(C), pages 35-42.
  8. RLobert F. Vesztegy, Serizawa & Kenju Akai & Tatsuyoshi Saijo & Shigehiro Serizawa, 2009. "Auctions with Endogenous Price Ceiling:Theoretical and Experimental Results," ISER Discussion Paper 0747, Institute of Social and Economic Research, Osaka University.
  9. Beker, Pablo & Hernando-Veciana, Angel, 2013. "Bidding Markets with Financial Constraints," The Warwick Economics Research Paper Series (TWERPS) 1017, University of Warwick, Department of Economics.

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