Auctions versus Negotiations in Procurement: An Empirical Analysis
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
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