Optimality of simple procurement auctions

Oleksii Birulin

International Journal of Industrial Organization, 2020, vol. 70, issue C

Abstract: We consider procurement auctions for the projects where the cost of production is subject to ex-post shocks—cost overruns. The contractor may default due to these overruns, which affects the buyer’s expected cost. Here the lowest-bid auction emerges as the procurement mechanism that: (i) minimizes the expected transfers to the contractors, and (ii) requires the lowest surety bond to achieve a given probability of default. Since surety bonds are costly to post, the above makes a combination of the lowest-bid auction with the surety bond the optimal, i.e., the expected cost minimizing procurement mechanism in a wide range of parameters.

Keywords: Procurement tenders; Cost overruns; Surety bonds; Optimal auctions (search for similar items in EconPapers)
JEL-codes: D44 D82 H57 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:70:y:2020:i:c:s0167718720300321

DOI: 10.1016/j.ijindorg.2020.102610

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