Wild bids. Gambling for resurrection in procurement contracts
AbstractThis paper analyzes the problem of abnormally low tenders in the procurement process. Limited liability causes firms in a bad financial situation to bid more aggressively than good firms in the procurement auction. Therefore, it is more likely that the winning firm is a firm in financial difficulties with a high risk of bankruptcy. The paper analyzes the different regulatory practices to face this problem with a special emphasis on surety bonds used e.g. in the US. We characterize the optimal surety bond and show that it does not coincide with the current US regulation. In particular we show that under a natural assumption the US regulation is too expensive and provides overinsurance to the problem of abnormally low tenders.
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Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 553.
Date of creation: Mar 2001
Date of revision: Apr 2001
Contact details of provider:
Web page: http://www.econ.upf.edu/
Procurement; bankruptcy; abnormally low tenders; regulation;
Other versions of this item:
- Aleix Calveras & Juan-Jose Ganuza & Esther Hauk, 2004. "Wild Bids. Gambling for Resurrection in Procurement Contracts," Journal of Regulatory Economics, Springer, vol. 26(1), pages 41-68, 07.
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-06-14 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Juan J. Ganuza, 1998. "Competition and cost overruns. Optimal misspecification of procurement contracts," Economics Working Papers 471, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2002.
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"Limited Liability and Mechanism Design in Procurement,"
UFAE and IAE Working Papers
767.09, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- 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.
- Roberto Burguet & Juan-José Ganuza & Esther Hauk, 2009. "Limited Liability and Mechanism Design in Procurement," Working Papers 383, Barcelona Graduate School of Economics.
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0129, Dipartimento di Scienze Economiche "Marco Fanno".
- RLobert F. Vesztegy, Serizawa & Kenju Akai & Tatsuyoshi Saijo & Shigehiro Serizawa, 2009. "Auctions with Endogenous Price Ceiling:Theoretical and Experimental Results," ISER Discussion Paper 0747, Institute of Social and Economic Research, Osaka University.
- Chang, Wei-Shiun & Salmon, Timothy C. & Saral, Krista Jabs, 2013. "Procurement Auctions with Renegotiation and Wealth Constraints," MPRA Paper 50137, University Library of Munich, Germany.
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