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Procurement Contracts under Limited Liability

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  • Parlane, S.

Abstract

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.

Suggested Citation

  • Parlane, S., 1998. "Procurement Contracts under Limited Liability," Papers 98/3, College Dublin, Department of Political Economy-.
    • Handle: RePEc:fth:dublec:98/3
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    References listed on IDEAS

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    1. Mark Armstrong, 2000. "Optimal Multi-Object Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(3), pages 455-481.
    2. Matthews, Steven, 1987. "Comparing Auctions for Risk Averse Buyers: A Buyer's Point of View," Econometrica, Econometric Society, vol. 55(3), pages 633-646, May.
    3. repec:bla:scandj:v:90:y:1988:i:3:p:357-72 is not listed on IDEAS
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    7. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-259, April.
    8. 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.
    9. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
    10. Spulber, Daniel F, 1990. "Auctions and Contract Enforcement," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 6(2), pages 325-344, Fall.
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    Citations

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    Cited by:

    1. Oleksii Birulin & Sergei Izmalkov, 2022. "On advance payments in tenders with budget constrained contractors," RAND Journal of Economics, RAND Corporation, vol. 53(4), pages 733-762, December.
    2. Pagnozzi, Marco & Saral, Krista J., 2019. "Auctions with limited liability through default or resale," Journal of Economic Behavior & Organization, Elsevier, vol. 159(C), pages 51-74.
    3. David Lagziel & Ehud Lehrer, 2019. "A Bias of Screening," American Economic Review: Insights, American Economic Association, vol. 1(3), pages 343-356, December.
    4. Fleck, Ann-Katrin & Anatolitis, Vasilios, 2023. "Achieving the objectives of renewable energy policy – Insights from renewable energy auction design in Europe," Energy Policy, Elsevier, vol. 173(C).
    5. Ottorino Chillemi & Claudio Mezzetti, 2014. "Optimal procurement mechanisms: bidding on price and damages for breach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(2), pages 335-355, February.
    6. 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.
    7. Lorentziadis, Panos L., 2016. "Optimal bidding in auctions from a game theory perspective," European Journal of Operational Research, Elsevier, vol. 248(2), pages 347-371.
    8. Wei-Shiun Chang & Timothy C. Salmon & Krista J. Saral, 2016. "Procurement Auctions With Renegotiation And Wealth Constraints," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1684-1704, July.
    9. Kreiss, Jan & Ehrhart, Karl-Martin & Haufe, Marie-Christin, 2017. "Appropriate design of auctions for renewable energy support – Prequalifications and penalties," Energy Policy, Elsevier, vol. 101(C), pages 512-520.
    10. Guillermo Durán & Rafael Epstein & Cristian Martinez & Gonzalo Andres Zamorano, 2011. "Quantitative Methods for a New Configuration of Territorial Units in a Chilean Government Agency Tender Process," Interfaces, INFORMS, vol. 41(3), pages 263-277, June.
    11. Marinakis, Kosmas & Tsoulouhas, Theofanis, 2013. "Are tournaments optimal over piece rates under limited liability for the principal?," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 223-237.
    12. Birulin, Oleksii, 2020. "Optimality of simple procurement auctions," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    13. Ehrhart, Karl-Martin & Ott, Marion & Seifert, Stefan & Wang, Runxi, 2024. "Combinatorial auctions for renewable energy — potentials and challenges," Energy Policy, Elsevier, vol. 186(C).
    14. Lagziel, David, 2019. "Credit auctions and bid caps," Games and Economic Behavior, Elsevier, vol. 113(C), pages 416-422.
    15. Sander Onderstal & Ailko van der Veen, 2011. "Keeping out Trojan Horses: Auctions and Bankruptcy in the Laboratory," Tinbergen Institute Discussion Papers 11-024/1, Tinbergen Institute.

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    More about this item

    Keywords

    FINANCIAL MARKET;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G1 - Financial Economics - - General Financial Markets

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