A Game Of Settlements In Public Contracts
AbstractThe paper considers a public authority wishing to carry out a major public project. As a result of competitive bidding the project is assigned to the firm with the lowest bid. The cost of the project is uncertain in the sense that it can be low or high. After the bidding process the firm observes the true cost, while the government remains uninformed. After learning about the true cost, the firm can start to renegotiate the contract by proposing an increase of the price. Such an increase is only justified in case costs are high. If the government rejects the new price proposal, a law suit follows.This situation is modeled as a signaling game. If the prior probability of the costs being low is low (high), a pooling (separating) equilibrium occurs. In the pooling equilibrium the government always accepts the firm's proposal. In the separating equilibrium the government can apply a mixed strategy when costs are high. Then it goes to court with a certain probability. Compared to a pure strategy, the mixed strategy has the advantage that legal costs are lower.In our economic analysis we compare the American and the English rule for sharing the litigation expenses. A main result is that under the American rule the legal expenses are lower and welfare is higher in the mixed strategy equilibrium. We also study the importance of the firm's commitment to its new price proposal.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Game Theory Review.
Volume (Year): 11 (2009)
Issue (Month): 02 ()
Contact details of provider:
Web page: http://www.worldscinet.com/igtr/igtr.shtml
Find related papers by JEL classification:
- B4 - Schools of Economic Thought and Methodology - - Economic Methodology
- C0 - Mathematical and Quantitative Methods - - General
- C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D5 - Microeconomics - - General Equilibrium and Disequilibrium
- D7 - Microeconomics - - Analysis of Collective Decision-Making
- M2 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tai Tone Lim).
If references are entirely missing, you can add them using this form.