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Bundling Decision in Procurement Auctions with Risk-Averse Suppliers

  • Takeshi Nishimura
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    In a two-stage procurement model, we compare two contracting schemes: bundling and unbundling. They differ in whether two sequential tasks of investment and service provision are bundled or not in the auction. We show that while unbundling causes underinvestment in cost reduction and bundling causes the ex post inefficiency of trade, each scheme imposes some forms of risk on the suppliers. The comparative statics results show that as the investment is more costly and/or a common cost component is more risky, bundling becomes less attractive to both the buyer and society.

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    Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd12-237.

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    Date of creation: Jul 2012
    Date of revision:
    Handle: RePEc:hst:ghsdps:gd12-237
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    1. Patrick W. Schmitz, 2005. "Allocating control in agency problems with limited liability and sequential hidden actions," Bonn Econ Discussion Papers bgse27_2005, University of Bonn, Germany.
    2. Hoppe, Eva I & Schmitz, Patrick W, 2010. "Public-private partnerships versus traditional procurement: Innovation incentives and information gathering," CEPR Discussion Papers 7681, C.E.P.R. Discussion Papers.
    3. Holt, Charles A, Jr, 1980. "Competitive Bidding for Contracts under Alternative Auction Procedures," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 433-45, June.
    4. Eric Maskin & Jean Tirole, 2006. "Public-private Partnerships and Government Spending Limits," Economics Working Papers 0075, Institute for Advanced Study, School of Social Science.
    5. Bennett, John & Elisabetta Iossa, 2002. "Building and Managing Facilities for Public Services," Royal Economic Society Annual Conference 2002 22, Royal Economic Society.
    6. David Martimort & Jérôme Pouyet, 2008. "To build or not to build: Normative and positive theories of public-private partnerships," Post-Print halshs-00754298, HAL.
    7. Hoppe, Eva I & Kusterer, David J & Schmitz, Patrick W, 2010. "Public-private partnerships versus traditional procurement: An experimental investigation," CEPR Discussion Papers 8167, C.E.P.R. Discussion Papers.
    8. Oliver Hart, 2003. "Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships," Economic Journal, Royal Economic Society, vol. 113(486), pages C69-C76, March.
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