Auctions vs. Negotiations:The Effects of Inefficient Renegotiation

Fabian Herweg () and Klaus Schmidt ()

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: For the procurement of complex goods the early exchange of information is important to avoid costly renegotiation ex post. We show that this is achieved by bilateral negotiations but not by auctions. Negotiations strictly outperforms auctions if sellers are likely to have superior information about possible design improvements, if renegotiation is costly, and if the buyer's bargaining position is sufficiently strong. Moreover, we show that negotiations provide stronger incentives for sellers to investigate possible design improvements than auctions. This provides an explanation for the widespread use of negotiations as a procurement mechanism in private industry.

Keywords: Auctions; Negotiations; Procurement; Renegotiation; Adaptation Costs; Loss Aversion; Behavioral Contract Theory. (search for similar items in EconPapers)
JEL-codes: D03 D82 D83 H57 (search for similar items in EconPapers)
Date: 2014-11-25
New Economics Papers: this item is included in nep-com, nep-cta and nep-mic
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https://epub.ub.uni-muenchen.de/22030/1/484.pdf (application/pdf)

Related works:
Working Paper: Auctions vs. Negotiations: The Effects of Inefficient Renegotiation (2015)
Working Paper: Auctions vs. Negotiations: The Effects of Inefficient Renegotiation (2014)
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