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Bundling Decision in Procurement Auctions with Risk-Averse Suppliers

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  • Takeshi Nishimura

Abstract

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.

Suggested Citation

  • Takeshi Nishimura, 2012. "Bundling Decision in Procurement Auctions with Risk-Averse Suppliers," Global COE Hi-Stat Discussion Paper Series gd12-237, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hst:ghsdps:gd12-237
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    File URL: http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd12-237.pdf
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    References listed on IDEAS

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    1. Hoppe, Eva I. & Kusterer, David J. & Schmitz, Patrick W., 2013. "Public–private partnerships versus traditional procurement: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 145-166.
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    4. Martimort, David & Pouyet, Jerome, 2008. "To build or not to build: Normative and positive theories of public-private partnerships," International Journal of Industrial Organization, Elsevier, pages 393-411.
    5. Patrick W. Schmitz, 2005. "Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions," RAND Journal of Economics, The RAND Corporation, pages 318-336.
    6. Eva I. Hoppe & Patrick W. Schmitz, 2013. "Public-private partnerships versus traditional procurement: Innovation incentives and information gathering," RAND Journal of Economics, RAND Corporation, pages 56-74.
    7. 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 69-76, March.
    8. Krishna, Vijay, 2009. "Auction Theory," Elsevier Monographs, Elsevier, edition 2, number 9780123745071.
    9. Yescombe, E. R. & Yescombe, E. R., 2007. "Public-Private Partnerships," Elsevier Monographs, Elsevier, edition 1, number 9780750680547.
    10. 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 433-445, June.
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