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.:
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- Pablo F. Beker & Ángel Hernando-Veciana, 2011. "Persistent markups in bidding markets with financial constraints," Economics Working Papers we1133, Universidad Carlos III, Departamento de Economía.
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