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Sequential Procurement Auctions and Their Effect on Investment Decisions

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Author Info
Nicolás Figueroa
Gonzalo Cisternas ()

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Abstract

In this paper we characterize the optimal procurement mechanism and the investment level for an environment where two projects must be adjudicated sequentially, and the winner of the first project has the opportunity to invest in a distributional upgrade for its costs in the second project. We study 4 cases, based on the commitment level of the seller and the observability of the investment decision. We find that with commitment, the second period mechanism gives an advantage to the first period winner, and induces an investment level that is greater than the efficient one. With non-commitment, the second period mechanism gives a disadvantage to the first period winner, and induces an investment level that is smaller than the efficient one. Observability is irrelevant in the commitment case, but makes the effects more pronounced in the non-commitment case.

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Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 230.

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Date of creation: 2007
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Handle: RePEc:edj:ceauch:230

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  1. Piccione, Michele & Tan, Guofu, 1996. "Cost-Reducing Investment, Optimal Procurement and Implementation by Auctions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 663-85, August.
  2. Dasgupta, Sudipto, 1990. "Competition for Procurement Contracts and Underinvestment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(4), pages 841-65, November. [Downloadable!] (restricted)
  3. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn. [Downloadable!] (restricted)
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  4. Leandro Arozamena & Estelle Cantillon, 2004. "Investment Incentives in Procurement Auctions," Review of Economic Studies, Blackwell Publishing, vol. 71(1), pages 1-18, 01. [Downloadable!] (restricted)
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  1. Gonzalo Cisternas & Nicolás Figueroa, 2007. "A Note on the Comparative Statics of Optimal Procurement Auctions," Documentos de Trabajo 240, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
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