Optimal Cost Overruns: Procurement Auctions and Renegotiation

Fabian Herweg () and Marco Schwarz

No 11179, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Cost overrun is ubiquitous in public procurement. We argue that this can be the result of a constraint optimal award procedure when the procurer cannot commit not to renegotiate. If cost differences are more pronounced for more complex designs, it is optimal to fix a simple design ex ante and to renegotiate to a more complex and costlier design ex post. Specifying a simple design initially enhances competition in the auction. Moreover, the procurer cannot benefit from using a multi-dimensional auction, as the optimal scoring rule depends only on the price.

Keywords: Auction; Cost overrun; Procurement; Renegotiation (search for similar items in EconPapers)
JEL-codes: D44 D82 H57 (search for similar items in EconPapers)
Date: 2016-03
New Economics Papers: this item is included in nep-cta, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Optimal Cost Overruns: Procurement Auctions and Renegotiation (2016)
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