I analyze in this paper procurement from agents protected by limited liability. I model limited liability as a verifiable bargaining tool that enables the agents to induce renegotiation when the contracted price does not cover the project's cost. I show that the determination of the optimal mechanism is based on a trade-off between playing informal rents and renegotiation costs. When the renegotiation costs are sufficiently large the first price auction is optimal among efficient mechanisms.
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Paper provided by College Dublin, Department of Political Economy- in its series Papers with number
98/3.
Length: 34 pages Date of creation: 1998 Date of revision: Handle: RePEc:fth:dublec:98/3
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Find related papers by JEL classification: D44 - Microeconomics - - Market Structure and Pricing - - - Auctions G1 - Financial Economics - - General Financial Markets
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