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Auctions Versus Negotiations in Procurement: An Empirical Analysis

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  • Patrick Bajari
  • Robert S. McMillan
  • Steve Tadelis

Abstract

Should the buyer of a customized good use competitive bidding or negotiation to select a contractor? To shed light on this question, we offer a framework that compares auctions with negotiations. We then examine a comprehensive data set of private sector building contracts awarded in Northern California during the years 1995-2000. The analysis suggests a number of potential limitations to the use of auctions. Auctions perform poorly when projects are complex, contractual design is incomplete and there are few available bidders. Furthermore, auctions stifle communication between buyers and the sellers, preventing the buyer from utilizing the contractor's expertise when designing the project. Some implications of these results for procurement in the public sector are discussed.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9757.

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Date of creation: Jun 2003
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Publication status: published as Bajari, Patrick, Steve Tadelis, and Rob McMillan. "Auctions versus Negotiations in Procurement: An Empirical Analysis." Journal of Law, Economics and Organization 25, 2 (2009): 372-399.
Handle: RePEc:nbr:nberwo:9757

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  1. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
  2. Daniel A. Ackerberg & Maristella Botticini, 1999. "Endogenous Matching and the Empirical Determinants of Contract Form," Boston University - Institute for Economic Development, Boston University, Institute for Economic Development 92, Boston University, Institute for Economic Development.
  3. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers, Stanford - Institute for Thoretical Economics 11, Stanford - Institute for Thoretical Economics.
  4. Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(1), pages 225-38, January.
  5. Manelli, Alejandro M & Vincent, Daniel R, 1995. "Optimal Procurement Mechanisms," Econometrica, Econometric Society, Econometric Society, vol. 63(3), pages 591-620, May.
  6. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 25(2), pages 699-738, June.
  7. Patrick Bajari & Lixin Ye, 2001. "Competition Versus Collusion in Procurement Auctions: Identification and Testing," Working Papers, Stanford University, Department of Economics 01001, Stanford University, Department of Economics.
  8. Robert H. Porter, 1992. "The Role of Information in U.S. Offshore Oil and Gas Lease Auctions," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1008, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. William P. Rogerson, 1994. "Economic Incentives and the Defense Procurement Process," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 8(4), pages 65-90, Fall.
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