A Game Of Settlements In Public Contracts
The paper considers a public authority wishing to carry out a major public project. As a result of competitive bidding the project is assigned to the firm with the lowest bid. The cost of the project is uncertain in the sense that it can be low or high. After the bidding process the firm observes the true cost, while the government remains uninformed. After learning about the true cost, the firm can start to renegotiate the contract by proposing an increase of the price. Such an increase is only justified in case costs are high. If the government rejects the new price proposal, a law suit follows.This situation is modeled as a signaling game. If the prior probability of the costs being low is low (high), a pooling (separating) equilibrium occurs. In the pooling equilibrium the government always accepts the firm's proposal. In the separating equilibrium the government can apply a mixed strategy when costs are high. Then it goes to court with a certain probability. Compared to a pure strategy, the mixed strategy has the advantage that legal costs are lower.In our economic analysis we compare the American and the English rule for sharing the litigation expenses. A main result is that under the American rule the legal expenses are lower and welfare is higher in the mixed strategy equilibrium. We also study the importance of the firm's commitment to its new price proposal.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 11 (2009)
Issue (Month): 02 ()
|Contact details of provider:|| Web page: http://www.worldscinet.com/igtr/igtr.shtml|
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:wsi:igtrxx:v:11:y:2009:i:02:p:157-179. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tai Tone Lim)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.