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Procurement contracts under limited liability

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  • Sarah Parlane

Abstract

This paper analyses procurement when contractors have limited liability and when the sponsor cannot commit to any specific form of future negotiation. It shows that introducing limited liability enhances competition and thus the likelihood of bankruptcy. Among efficient auctions in which only the winner gets paid, the commonly used first price auction is shown to give the lowest probability of bankruptcy. Finally, it shows that the characterisation of a mechanism minimising the project’s cost results from trading-off bankruptcy costs with informational rents.

Suggested Citation

  • Sarah Parlane, 2003. "Procurement contracts under limited liability," Open Access publications 10197/685, School of Economics, University College Dublin.
  • Handle: RePEc:ucn:oapubs:10197/685
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    File URL: http://hdl.handle.net/10197/685
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    References listed on IDEAS

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    1. Mark Armstrong, 2000. "Optimal Multi-Object Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(3), pages 455-481.
    2. Matthews, Steven, 1987. "Comparing Auctions for Risk Averse Buyers: A Buyer's Point of View," Econometrica, Econometric Society, vol. 55(3), pages 633-646, May.
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    10. Spulber, Daniel F, 1990. "Auctions and Contract Enforcement," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 6(2), pages 325-344, Fall.
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    Citations

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    Cited by:

    1. Oleksii Birulin & Sergei Izmalkov, 2022. "On advance payments in tenders with budget constrained contractors," RAND Journal of Economics, RAND Corporation, vol. 53(4), pages 733-762, December.
    2. Pagnozzi, Marco & Saral, Krista J., 2019. "Auctions with limited liability through default or resale," Journal of Economic Behavior & Organization, Elsevier, vol. 159(C), pages 51-74.
    3. David Lagziel & Ehud Lehrer, 2019. "A Bias of Screening," American Economic Review: Insights, American Economic Association, vol. 1(3), pages 343-356, December.
    4. Fleck, Ann-Katrin & Anatolitis, Vasilios, 2023. "Achieving the objectives of renewable energy policy – Insights from renewable energy auction design in Europe," Energy Policy, Elsevier, vol. 173(C).
    5. Ottorino Chillemi & Claudio Mezzetti, 2014. "Optimal procurement mechanisms: bidding on price and damages for breach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(2), pages 335-355, February.
    6. Burguet, Roberto & Ganuza, Juan-José & Hauk, Esther, 2012. "Limited liability and mechanism design in procurement," Games and Economic Behavior, Elsevier, vol. 76(1), pages 15-25.
    7. Lorentziadis, Panos L., 2016. "Optimal bidding in auctions from a game theory perspective," European Journal of Operational Research, Elsevier, vol. 248(2), pages 347-371.
    8. Wei-Shiun Chang & Timothy C. Salmon & Krista J. Saral, 2016. "Procurement Auctions With Renegotiation And Wealth Constraints," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1684-1704, July.
    9. Kreiss, Jan & Ehrhart, Karl-Martin & Haufe, Marie-Christin, 2017. "Appropriate design of auctions for renewable energy support – Prequalifications and penalties," Energy Policy, Elsevier, vol. 101(C), pages 512-520.
    10. Guillermo Durán & Rafael Epstein & Cristian Martinez & Gonzalo Andres Zamorano, 2011. "Quantitative Methods for a New Configuration of Territorial Units in a Chilean Government Agency Tender Process," Interfaces, INFORMS, vol. 41(3), pages 263-277, June.
    11. Marinakis, Kosmas & Tsoulouhas, Theofanis, 2013. "Are tournaments optimal over piece rates under limited liability for the principal?," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 223-237.
    12. Birulin, Oleksii, 2020. "Optimality of simple procurement auctions," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    13. Lagziel, David, 2019. "Credit auctions and bid caps," Games and Economic Behavior, Elsevier, vol. 113(C), pages 416-422.
    14. Sander Onderstal & Ailko van der Veen, 2011. "Keeping out Trojan Horses: Auctions and Bankruptcy in the Laboratory," Tinbergen Institute Discussion Papers 11-024/1, Tinbergen Institute.

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    More about this item

    Keywords

    Industrial procurement--Mathematical models;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G1 - Financial Economics - - General Financial Markets

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