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Sequential Procurement Auctions and Their Effect on Investment Decisions

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  • Nicolás Figueroa
  • Gonzalo Cisternas

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Abstract

In this paper we characterize the optimal procurement mechanism and the investment level for an environment where two projects must be adjudicated sequentially, and the winner of the first project has the opportunity to invest in a distributional upgrade for its costs in the second project. We study 4 cases, based on the commitment level of the seller and the observability of the investment decision. We find that with commitment, the second period mechanism gives an advantage to the first period winner, and induces an investment level that is greater than the efficient one. With non-commitment, the second period mechanism gives a disadvantage to the first period winner, and induces an investment level that is smaller than the efficient one. Observability is irrelevant in the commitment case, but makes the effects more pronounced in the non-commitment case.

Suggested Citation

  • Nicolás Figueroa & Gonzalo Cisternas, 2007. "Sequential Procurement Auctions and Their Effect on Investment Decisions," Documentos de Trabajo 230, Centro de Economía Aplicada, Universidad de Chile.
  • Handle: RePEc:edj:ceauch:230
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    File URL: http://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120070508101238.pdf
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    References listed on IDEAS

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    1. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Dasgupta, Sudipto, 1990. "Competition for Procurement Contracts and Underinvestment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(4), pages 841-865, November.
    3. Leandro Arozamena & Estelle Cantillon, 2004. "Investment Incentives in Procurement Auctions," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 1-18.
    4. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
    5. Piccione, Michele & Tan, Guofu, 1996. "Cost-Reducing Investment, Optimal Procurement and Implementation by Auctions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 663-685, August.
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    Cited by:

    1. Rosar, Frank & Mueller, Florian, 2014. "Negotiating cultures in corporate procurement," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100599, Verein für Socialpolitik / German Economic Association.
    2. Andreas Asseyer, 2015. "Optimal monitoring in dynamic procurement contracts," Working Papers 2015002, Berlin Doctoral Program in Economics and Management Science (BDPEMS).
    3. Gonzalo Cisternas & Nicolás Figueroa, 2007. "A Note on the Comparative Statics of Optimal Procurement Auctions," Documentos de Trabajo 240, Centro de Economía Aplicada, Universidad de Chile.
    4. Zhang, Heng & Yang, Ming & Bao, Jiye & Gong, Pu, 2013. "Competitive investing equilibrium under a procurement mechanism," Economic Modelling, Elsevier, vol. 31(C), pages 734-738.

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