Optimal Cost Overruns: Procurement Auctions with Renegotiation

Fabian Herweg () and Marco Schwarz

No 56, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: Cost overrun is ubiquitous in public procurement. We argue that this can be the result of a constrained optimal award procedure: The procurer awards the contract via a price-only auction and cannot commit not to renegotiate. If cost differences are more pronounced for a fancy than a standard design, it is optimal to fix the standard design ex ante. If renegotiation takes place and the fancy design has higher production costs or the contractor\'s bargaining position is strong, the final price exceeds the initial price. Moreover, the procurer cannot benefit from using a multi-dimensional auction, i.e., under the optimal scoring auction each supplier proposes the standard design.

Keywords: auction; cost overrun; procurement; renegotiation (search for similar items in EconPapers)
JEL-codes: D44 D82 H57 (search for similar items in EconPapers)
Date: 2017-11-09
New Economics Papers: this item is included in nep-cta, nep-des, nep-mic and nep-reg
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Journal Article: OPTIMAL COST OVERRUNS: PROCUREMENT AUCTIONS WITH RENEGOTIATION (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:56

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