Procurement Contracts under Limited Liability
This paper analyses procurement when contractors have limited liability and when the sponsor cannot commit to any specific form of future negotiation. It shows that introducing limited liability enhances competition and thus the likelihood of bankruptcy. Among efficient auctions in which only the winner gets paid, the commonly used first price auction is shown to give the lowest probability of bankruptcy. Finally, it shows that the characterisation of a mechanism minimising the project’s cost results from trading-off bankruptcy costs with informational rents.
References listed on IDEAS
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- Mark Armstrong, 2000. "Optimal Multi-Object Auctions," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 455-481.
- Yossef Spiegel, 1996. "The Role of Debt in Procurement Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(3), pages 379-407, 09.
- Riordan, Michael H & Sappington, David E M, 1988. " Commitment in Procurement Contracting," Scandinavian Journal of Economics, Wiley Blackwell, vol. 90(3), pages 357-72.
- Steven A. Matthews, 1985.
"Comparing Auctions for Risk Averse Buyers: A Buyer's Pointof View,"
664R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Matthews, Steven, 1987. "Comparing Auctions for Risk Averse Buyers: A Buyer's Point of View," Econometrica, Econometric Society, vol. 55(3), pages 633-46, May.
- Spulber, Daniel F, 1990. "Auctions and Contract Enforcement," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(2), pages 325-44, Fall.
- J. Riley & E. Maskin, 1981.
"Optimal Auctions with Risk Averse Buyers,"
311, Massachusetts Institute of Technology (MIT), Department of Economics.
- Tirole, Jean, 1986.
"Procurement and Renegotiation,"
Journal of Political Economy,
University of Chicago Press, vol. 94(2), pages 235-59, April.
- R. Preston McAfee & John McMillan, 1986. "Bidding for Contracts: A Principal-Agent Analysis," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 326-338, Autumn.
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