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Procurement Auctions with Renegotiation and Wealth Constraints

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  • Chang, Wei-Shiun
  • Salmon, Timothy C.
  • Saral, Krista Jabs

Abstract

Renegotiation is a common practice in procurement auctions which allows for post-auction price adjustments and is nominally intended to deal with the problem that sellers might underestimate the eventual costs of a project during the auction. Using a combination of theory and experiments, we examine the effectiveness of renegotiation at solving this problem. Our findings demonstrate that renegotiation is rarely successful at solving the problem of sellers misestimating costs. The primary effect of allowing renegotiation is that it advantages sellers who possess a credible commitment of default should they have underbid the project. Renegotiation allows these weaker types of sellers to win more often and it also allows them to leverage their commitment of default into higher prices in renegotiation from a buyer.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 50137.

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Date of creation: Aug 2013
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Handle: RePEc:pra:mprapa:50137

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Keywords: Procurement auctions; renegotiation; bankruptcy; default; economic experiments;

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  1. Aleix Calveras & Juan J. Ganuza & Esther Hauk, 2001. "Wild bids. Gambling for resurrection in procurement contracts," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 553, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2001.
  2. Wang, Ruqu, 2000. "Bidding and renegotiation in procurement auctions," European Economic Review, Elsevier, Elsevier, vol. 44(8), pages 1577-1597, August.
  3. Francesco Decarolis, 2009. "When the highest bidder loses the auction: theory and evidence from public procurement," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 717, Bank of Italy, Economic Research and International Relations Area.
  4. Theo Offerman, 2002. "Efficiency in Auctions with Private and Common Values: An Experimental Study," American Economic Review, American Economic Association, American Economic Association, vol. 92(3), pages 625-643, June.
  5. Waehrer Keith, 1995. "A Model of Auction Contracts with Liquidated Damages," Journal of Economic Theory, Elsevier, Elsevier, vol. 67(2), pages 531-555, December.
  6. John H. Kagel & Jean-Francois Richard, 2001. "Super-Experienced Bidders In First-Price Common-Value Auctions: Rules Of Thumb, Nash Equilibrium Bidding, And The Winner'S Curse," The Review of Economics and Statistics, MIT Press, vol. 83(3), pages 408-419, August.
  7. Jacob K. Goeree & Theo Offerman, 1999. "Competitive Bidding in Auctions with Private and Common Values," Virginia Economics Online Papers 337, University of Virginia, Department of Economics.
  8. Sarah Parlane, 2003. "Procurement Contracts under Limited Liability," The Economic and Social Review, Economic and Social Studies, Economic and Social Studies, vol. 34(1), pages 1–21.
  9. Matthew Roelofs, 2002. "Common Value Auctions with Default: An Experimental Approach," Experimental Economics, Springer, Springer, vol. 5(3), pages 233-252, December.
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