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Procurement Contracts under Limited Liability

  • Parlane, S.

I analyze in this paper procurement from agents protected by limited liability. I model limited liability as a verifiable bargaining tool that enables the agents to induce renegotiation when the contracted price does not cover the project's cost. I show that the determination of the optimal mechanism is based on a trade-off between playing informal rents and renegotiation costs. When the renegotiation costs are sufficiently large the first price auction is optimal among efficient mechanisms.

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Paper provided by College Dublin, Department of Political Economy- in its series Papers with number 98/3.

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Length: 34 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:fth:dublec:98/3
Contact details of provider: Postal: Ireland; University College Dublin, Department of Political Economy, Centre for Economic Research, Belfield, Dublin 4
Phone: +353-1-7067777
Fax: +353-1-283 0068
Web page: http://www.ucd.ie/economics/

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  1. Riordan, Michael H & Sappington, David E M, 1988. " Commitment in Procurement Contracting," Scandinavian Journal of Economics, Wiley Blackwell, vol. 90(3), pages 357-72.
  2. Spulber, Daniel F, 1990. "Auctions and Contract Enforcement," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(2), pages 325-44, Fall.
  3. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-59, April.
  4. 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.
  5. Maskin, Eric S & Riley, John G, 1984. "Optimal Auctions with Risk Averse Buyers," Econometrica, Econometric Society, vol. 52(6), pages 1473-1518, November.
  6. Armstrong, Mark, 2000. "Optimal Multi-object Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 455-81, July.
  7. 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.
  8. Yossef Spiegel, 1996. "The Role of Debt in Procurement Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(3), pages 379-407, 09.
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