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Auctions versus Negotiations in Procurement: An Empirical Analysis

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  • Patrick Bajari
  • Robert McMillan
  • Steven Tadelis

Abstract

Revised October 2002 When should a buyer award a procurement contract through competitive bidding, and when would negotiating with the sellers be preferred? To shed some light on this question, we examine a unique data set of non-residential, private sector building contracts awarded in Northern California during the years 1995-2000. Our analysis suggests a number of limitations to the use of auctions, as compared to negotiations, that we believe are new to the literature. First, auctions perform poorly when projects are complex and contractual design is incomplete. Second, the benefits to auctions fall when the number of available bidders decreases. Third, auctions stifle communication between the buyer and the contractor, preventing the buyer from taking advantage of the contractor’s expertise when choosing how to design the project. Finally, auctions fail to protect the privacy of the buyer and involve increased administrative expenses and delay. Working Papers Index

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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 02007.

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Handle: RePEc:wop:stanec:02007

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  1. Porter, Robert H, 1995. "The Role of Information in U.S. Offshore Oil and Gas Lease Auctions," Econometrica, Econometric Society, vol. 63(1), pages 1-27, January.
  2. William P. Rogerson, 1994. "Economic Incentives and the Defense Procurement Process," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 65-90, Fall.
  3. Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 225-38, January.
  4. Patrick Bajari & Steven Tadelis, 1999. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," Working Papers 99029, Stanford University, Department of Economics.
  5. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
  6. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
  7. Daniel A. Ackerberg & Maristella Botticini, 1999. "Endogenous Matching and the Empirical Determinants of Contract Form," Papers 0096, Boston University - Industry Studies Programme.
  8. Alejandro M. Manelli & Daniel R. Vincent, 1992. "Optimal Procurement Mechanisms," Discussion Papers 999, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Patrick Bajari & Lixin Ye, 2001. "Competition Versus Collusion in Procurement Auctions: Identification and Testing," Working Papers 01001, Stanford University, Department of Economics.
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