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Precontractual investment and modes of procurement

Alessandro De Chiara

European Economic Review, 2020, vol. 124, issue C

Abstract: Consider a repeated game in which a buyer must decide whether to procure goods whose design may prove defective through auctions or negotiations. To reduce the likelihood of failure, the buyer must motivate the potential suppliers to make a precontractual investment. Because the noisy signal of the supplier’s investment is non-verifiable the buyer can induce the suppliers to invest only through relational contracts. I find that auctions may not enable the buyer to implement a surplus-increasing relational contract even when the players are very patient. Therefore, negotiations may be adopted, since they are more effective in stimulating the supplier’s investment.

Keywords: Auctions; Negotiations; Precontractual investment; Procurement; Relational contracts (search for similar items in EconPapers)
JEL-codes: D82 D86 L14 L22 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Precontractual Investment and Modes of Procurement (2015) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:124:y:2020:i:c:s0014292120300362

DOI: 10.1016/j.euroecorev.2020.103404

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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