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Auctions versus Negotiations in Procurement: An Empirical Analysis

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  • Patrick Bajari
  • Robert McMillan
  • Steven Tadelis

Abstract

Revised October 2002 When should a buyer award a procurement contract through competitive bidding, and when would negotiating with the sellers be preferred? To shed some light on this question, we examine a unique data set of non-residential, private sector building contracts awarded in Northern California during the years 1995-2000. Our analysis suggests a number of limitations to the use of auctions, as compared to negotiations, that we believe are new to the literature. First, auctions perform poorly when projects are complex and contractual design is incomplete. Second, the benefits to auctions fall when the number of available bidders decreases. Third, auctions stifle communication between the buyer and the contractor, preventing the buyer from taking advantage of the contractor’s expertise when choosing how to design the project. Finally, auctions fail to protect the privacy of the buyer and involve increased administrative expenses and delay. Working Papers Index

Suggested Citation

  • Patrick Bajari & Robert McMillan & Steven Tadelis, "undated". "Auctions versus Negotiations in Procurement: An Empirical Analysis," Working Papers 02007, Stanford University, Department of Economics.
    • Handle: RePEc:wop:stanec:02007
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    References listed on IDEAS

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    1. Paarsch, Harry J., 1992. "Deciding between the common and private value paradigms in empirical models of auctions," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 191-215.
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    More about this item

    JEL classification:

    • L0 - Industrial Organization - - General
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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