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Public Procurement Under Limited Liability

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Author Info

  • Andreas R. Engel

    ()
    (TWS Partners, Munich)

  • Achim Wambach

    ()
    (University of Cologne)

Abstract

Public procurement faces the risk that the contractor goes bankrupt before the completion of the work. The possibility to declare bankruptcy makes the contractors behave more aggressively.This leads to abnormally low tenders and to the break-down of revenue equivalence. Upon this result we investigate frequently used public procurement methods that were designed to avoid the bankruptcy of the winning contractor. We show that the averagebid-method or methods that exclude the lowest offer fare quite badly. We also show that — in contrast to standard auction theory — multi-sourcing, rationing and other means to soften competition may fare better than a standard auction.

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Bibliographic Info

Article provided by SIPI Spa in its journal Rivista di Politica Economica.

Volume (Year): 96 (2006)
Issue (Month): 1 (January-February)
Pages: 13-40

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Handle: RePEc:rpo:ripoec:v:96:y:2006:i:1:p:13-40

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Cited by:
  1. Roberto Burguet & Juan-José Ganuza & Esther Hauk, 2009. "Limited Liability and Mechanism Design in Procurement," Working Papers 383, Barcelona Graduate School of Economics.

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