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Auctions vs. Negotiations: The Case of Favoritism

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  • Vitali Gretschko
  • Achim Wambach

Abstract

We compare two commonly used mechanisms in procurement: auctions and negotiations. The execution of the procurement mechanism is delegated to an agent of the buyer. The agent has private information about the buyer’s preferences and may collude with one of the sellers. We provide a precise definition of both mechanisms and show – contrary to conventional wisdom – that an intransparent negotiation yields a higher buyer surplus than a transparent auction for a range of parameters. In particular, for small expected punishments there exists a lower and an upper bound on the number of sellers such that the negotiation yields a higher buyer surplus with a probability arbitrary close to 1 in the parameter space. Moreover, if the expected punishment is small, the negotiation is always more efficient and generates a higher surplus for the sellers.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4045.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_4045

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Keywords: corruption; auctions; negotiations; public procurement;

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  1. Athey, S., 1997. "Sigle Crossing Properties and the Existence of Pure Strategy Equilibria in Games of Incomplete Information," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 97-11, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Alejandro M. Manelli & Daniel R. Vincent, 1992. "Optimal Procurement Mechanisms," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 999, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Lengwiler, Yvan & Wolfstetter, Elmar, 2010. "Auctions and corruption: An analysis of bid rigging by a corrupt auctioneer," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(10), pages 1872-1892, October.
  4. Paulo Klinger Monteiro & Flavio Menezes, 2001. "Corruption and auctions," Microeconomics, EconWPA 0105002, EconWPA.
  5. Burguet Roberto & Perry Martin K, 2007. "Bribery and Favoritism by Auctioneers in Sealed-Bid Auctions," The B.E. Journal of Theoretical Economics, De Gruyter, De Gruyter, vol. 7(1), pages 1-27, June.
  6. Arozamena, Leandro & Weinschelbaum, Federico, 2009. "The effect of corruption on bidding behavior in first-price auctions," European Economic Review, Elsevier, Elsevier, vol. 53(6), pages 645-657, August.
  7. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Auction design and favoritism," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 9(1), pages 9-42, March.
  8. Marco Celentani & Juan J. Ganuza, 2000. "Corruption and competition in procurement," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 464, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2001.
  9. McMillan, John, 1995. "Why auction the spectrum?," Telecommunications Policy, Elsevier, Elsevier, vol. 19(3), pages 191-199, April.
  10. Florence Naegelen, 2002. "original papers : Implementing optimal procurement auctions with exogenous quality," Review of Economic Design, Springer, Springer, vol. 7(2), pages 135-153.
  11. Fluck, Zsuzsanna & John, Kose & Ravid, S. Abraham, 2007. "Privatization as an agency problem: Auctions versus private negotiations," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(9), pages 2730-2750, September.
  12. David McAdams & Michael Schwarz, 2007. "Credible Sales Mechanisms and Intermediaries," American Economic Review, American Economic Association, American Economic Association, vol. 97(1), pages 260-276, March.
  13. Andrea Prat & Tommaso M. Valletti, 2001. "Spectrum Auctious Versus Beauty Contests: Costs and Benefits," Rivista di Politica Economica, SIPI Spa, SIPI Spa, vol. 91(4), pages 65-114, April-May.
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