Limited liability and mechanism design in procurement

Roberto Burguet, Juan-José Ganuza and Esther Hauk

Games and Economic Behavior, 2012, vol. 76, issue 1, 15-25

Abstract: In the presence of cost uncertainty, limited liability introduces the possibility of default in procurement. If financial soundness is not perfectly observable, then financially weaker contractors are selected with higher probability in any incentive compatible mechanism. Informational rents are associated with the probability of default. By selecting the financially weakest contractor, stronger price competition (auctions) may not only increase the probability of default but also the contractorsʼ expected rents. Thus, weak conditions are sufficient for auctions to be suboptimal. In particular, we show that pooling at higher net worth may reduce the cost of procurement even when default is costless for the sponsor.

Keywords: Procurement; Limited liability; Bankruptcy (search for similar items in EconPapers)
JEL-codes: D44 H57 L51 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

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Related works:
Working Paper: Limited Liability and Mechanism Design in Procurement (2015)
Working Paper: Limited Liability and Mechanism Design in Procurement (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:76:y:2012:i:1:p:15-25

DOI: 10.1016/j.geb.2012.04.004

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