Auctioning Long-Term Projects under Financial Constraints

David Martimort and Malin Arve

No 23-1469, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: We consider a procurement auction for the provision of a basic service to which an add-on must later be appended. Potential providers are symmetric, have private information on their cost for the basic service and the winning firm must also implement the add-on. To finance cost-reducing activities related to the add-on, this firm may need extra funding by outside financiers. Non-verifiable effort in reducing these costs creates a moral hazard problem which makes the firm’s payoff function for the second period concave in returns over the relevant range. This concavity has two effects: It makes it more attractive to backload payments to facilitate information revelation and uncertainty on the cost of the add-on introduces a background risk which requires a risk premium. In this context, we characterize the optimal intertemporal structure of payments to the winning firm, equilibrium bidding behavior and reserve prices in the first-price auction with bidders.

Keywords: Auctions; procurement; financial constraints; dynamic mechanism design, asymmetric information; uncertainty; endogenous risk aversion. (search for similar items in EconPapers)
Date: 2023-09-18, Revised 2024-05
New Economics Papers: this item is included in nep-cfn, nep-cta, nep-ger, nep-gth, nep-mic, nep-ppm and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:128474

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