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Incomplete contracts in dynamic procurement

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  • Gretschko, Vitali
  • Pollrich, Martin

Abstract

We analyze the problem of a buyer who purchases a long-term project from one of several suppliers. A changing state of the world influences the costs of the suppliers. Complete contracts conditioning on all future realizations of the state are infeasible. We show that contractual incompleteness comes without a cost. The buyer achieves the same surplus with complete and incomplete contracts. The key insight is that the allocation prescribed by optimal complete contracts is sequentially optimal with incomplete contracts if the buyer does not receive too much information ex-interim. We show that the English auction restricts the information optimally.

Suggested Citation

  • Gretschko, Vitali & Pollrich, Martin, 2019. "Incomplete contracts in dynamic procurement," ZEW Discussion Papers 19-040, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:19040
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    References listed on IDEAS

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    Cited by:

    1. Matthew J. Walker & Elena Katok & Jason Shachat, 2023. "Trust and Trustworthiness in Procurement Contracts with Retainage," Management Science, INFORMS, vol. 69(6), pages 3492-3515, June.

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    More about this item

    Keywords

    incomplete contracts; repeated relationships; procurement; commitment;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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