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Transacting under a performance-based contract: The role of negotiation and competitive tendering

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  • Hensher, David A.
  • Stanley, John

Abstract

There is a growing body of theoretical and empirical evidence to support the promotion of awarding mechanisms with formal and informal devices, aimed at economic efficiency and effectiveness through the life of the contract, i.e., ex ante and ex post coordination. Building on growing arguments to support negotiations instead of auctions, Bajari et al. [Bajari, P., McMillan, R., Tadelis, S., 2002. Auctions versus Negotiations in Procurement: An Empirical Analysis, Department of Economics, Stanford University, October] suggest that auctions perform poorly when projects are complex and contractual design is incomplete. Areawide contracts in bus and rail appear to fit this circumstance, in contrast to somewhat simple and relatively unambiguous bus route contracts. This literature argues theoretically and empirically that auctions (i.e., competitive tendering) can stifle communication between buyers (i.e., the regulator) and sellers (i.e., the service provider), preventing the buyer from utilising the contractor's expertise when designing the project. A growing number of authors promote the case for greater emphasis on establishing a credible regulatory scheme able to govern the procurement of public services ex post, and that focusing on introducing market mechanisms via competitive tendering per se does not guarantee better value for money. Implicit in the arguments is the need to develop trusting partnerships and (incomplete) commercial contracts with unambiguous incentive and penalty structures throughout the life of a contract, with market mechanisms such as competitive tendering always present as a way forward when operators fail to comply under reasonable notice. This paper develops these themes as a way of gaining a better understanding of negotiated performance-based contracts.

Suggested Citation

  • Hensher, David A. & Stanley, John, 2008. "Transacting under a performance-based contract: The role of negotiation and competitive tendering," Transportation Research Part A: Policy and Practice, Elsevier, vol. 42(9), pages 1143-1151, November.
  • Handle: RePEc:eee:transa:v:42:y:2008:i:9:p:1143-1151
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    References listed on IDEAS

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    1. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
    2. Anne Yvrande‚ÄźBillon, 2006. "The Attribution Process Of Delegation Contracts In The French Urban Public Transport Sector: Why Competitive Tendering Is A Myth," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(4), pages 453-478, December.
    3. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    4. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-194, March.
    5. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    6. Stanley, John & Hensher, David A., 2008. "Delivering trusting partnerships for route bus services: A Melbourne case study," Transportation Research Part A: Policy and Practice, Elsevier, vol. 42(10), pages 1295-1301, December.
    7. David A. Hensher & Ian P. Wallis, 2005. "Competitive Tendering as a Contracting Mechanism for Subsidising Transport: The Bus Experience," Journal of Transport Economics and Policy, University of Bath, vol. 39(3), pages 295-322, September.
    8. Hensher, David A. & Houghton, Erne, 2004. "Performance-based quality contracts for the bus sector: delivering social and commercial value for money," Transportation Research Part B: Methodological, Elsevier, vol. 38(2), pages 123-146, February.
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