Limited Liability and Mechanism Design in Procurement

Esther Hauk, Juan-José Ganuza and Roberto Burguet

No 383, Working Papers from Barcelona School of Economics

Abstract: In the presence of cost uncertainty, limited liability introduces the possibility of default in procurement with its associated bankruptcy costs. When financial soundness is not perfectly observable, we show that incentive compatibility implies that financially less sound contractors are selected with higher probability in any feasible mechanism. Informational rents are associated with unsound financial situations. By selecting the financially weakest contractor, stronger price competition (auctions) may not only increase the probability of default but also expected rents. Thus, weak conditions are sufficient for auctions to be supoptimal. In particular, we show that pooling firms with higher assets may reduce the cost of procurement even when default is costless for the sponsor.

Keywords: limited liability; Procurement; bankruptcy (search for similar items in EconPapers)
JEL-codes: D44 H57 L51 (search for similar items in EconPapers)
Date: 2015-09
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://bw.bse.eu/wp-content/uploads/2023/01/1383-file.pdf (application/pdf)

Related works:
Journal Article: Limited liability and mechanism design in procurement (2012)
Working Paper: Limited Liability and Mechanism Design in Procurement (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:383

Access Statistics for this paper

More papers in Working Papers from Barcelona School of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Bruno Guallar ().