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Public Procurement Under Limited Liability

Author

Listed:
  • Andreas R. Engel

    () (TWS Partners, Munich)

  • Achim Wambach

    () (University of Cologne)

Abstract

Public procurement faces the risk that the contractor goes bankrupt before the completion of the work. The possibility to declare bankruptcy makes the contractors behave more aggressively.This leads to abnormally low tenders and to the break-down of revenue equivalence. Upon this result we investigate frequently used public procurement methods that were designed to avoid the bankruptcy of the winning contractor. We show that the averagebid-method or methods that exclude the lowest offer fare quite badly. We also show that — in contrast to standard auction theory — multi-sourcing, rationing and other means to soften competition may fare better than a standard auction.

Suggested Citation

  • Andreas R. Engel & Achim Wambach, 2006. "Public Procurement Under Limited Liability," Rivista di Politica Economica, SIPI Spa, vol. 96(1), pages 13-40, January-F.
  • Handle: RePEc:rpo:ripoec:v:96:y:2006:i:1:p:13-40
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    References listed on IDEAS

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    1. Kennickell, Arthur & Lusardi, Annamaria, 2005. "Disentangling the importance of the precautionary saving motive," CFS Working Paper Series 2006/15, Center for Financial Studies (CFS).
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    Cited by:

    1. Burguet, Roberto & Ganuza, Juan-José & Hauk, Esther, 2012. "Limited liability and mechanism design in procurement," Games and Economic Behavior, Elsevier, vol. 76(1), pages 15-25.

    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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