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Procurement Auctions with Renegotiation and Wealth Constraints

Author

Listed:
  • Chang, Wei-Shiun
  • Salmon, Timothy C.
  • Saral, Krista Jabs

Abstract

Renegotiation is a common practice in procurement auctions which allows for post-auction price adjustments and is nominally intended to deal with the problem that sellers might underestimate the eventual costs of a project during the auction. Using a combination of theory and experiments, we examine the effectiveness of renegotiation at solving this problem. Our findings demonstrate that renegotiation is rarely successful at solving the problem of sellers misestimating costs. The primary effect of allowing renegotiation is that it advantages sellers who possess a credible commitment of default should they have underbid the project. Renegotiation allows these weaker types of sellers to win more often and it also allows them to leverage their commitment of default into higher prices in renegotiation from a buyer.

Suggested Citation

  • Chang, Wei-Shiun & Salmon, Timothy C. & Saral, Krista Jabs, 2013. "Procurement Auctions with Renegotiation and Wealth Constraints," MPRA Paper 50137, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:50137
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    References listed on IDEAS

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    Cited by:

    1. Herweg, Fabian & Schwarz, Marco A., 2016. "Optimal Cost Overruns: Procurement Auctions and Renegotiation," CEPR Discussion Papers 11179, C.E.P.R. Discussion Papers.
    2. Herweg, Fabian & Schwarz, Marco A., 2017. "Optimal Cost Overruns: Procurement Auctions with Renegotiation," Rationality and Competition Discussion Paper Series 56, CRC TRR 190 Rationality and Competition.

    More about this item

    Keywords

    Procurement auctions; renegotiation; bankruptcy; default; economic experiments;

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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