Procurement under default risk: auctions or lotteries?
AbstractWe study optimal procurement in the presence of default risk. Contractors differ in the penalty they suffer in case of default, which is private information. If the loss to the procurer from non-completion is high relative to the cost of completion, the optimal mechanism is to assign the project by a fair lottery. The procurer pays the winner enough so that the project is always completed and extracts contractors' surplus by charging them participation fees. When the loss to the procurer from non-completion is low relative to the cost of completion, the project is assigned to the contractor with the highest probability of default; that is, the one with the lowest defaulting penalty. The optimal probability of default is inefficiently low: projects that would be first-best efficient not to complete are completed.
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 InfoPaper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0131.
Length: 30 pages
Date of creation: Mar 2011
Date of revision:
procurement; auctions; abnormally low tender; default risk.;
Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-02 (All new papers)
- NEP-CTA-2011-04-02 (Contract Theory & Applications)
- NEP-PPM-2011-04-02 (Project, Program & Portfolio Management)
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: (Fabio Maria Manenti).
If references are entirely missing, you can add them using this form.