The adverse effects of renegotiation in procurement auctions with endogenous liability

Wei-Shiun Chang

Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), 2019, vol. 81, issue C, 91-101

Abstract: We study the effects of the possibility of forming spin-off companies in procurement auctions with renegotiation in a common cost environment. Specifically, we report game theoretic predictions for this setting, which we then test using a laboratory experiment. We focus our analysis on the impact of these spin-off companies on seller bidding strategies and buyer renegotiation behavior. Our data show that sellers are more aggressive during bidding and renegotiation when it is possible to set up a spin-off company that will not assume the liability from a failed contract. As a result, procurer surplus decreases substantially. We observe greater harm to buyer surplus from renegotiation than previously documented in the literature. We associate seller aggressiveness with an increase in the number of insolvencies due to spin-offs. This finding suggests that procurers should exercise great caution when using renegotiation to avoid large surplus losses, because spin-offs may be widely used in practice.

Keywords: Procurement auctions; Renegotiation; Endogenous limited liability; Winner's curse; Ultimatum game (search for similar items in EconPapers)
JEL-codes: C72 C91 D44 (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S221480431830380X
Full text for ScienceDirect subscribers only

Related works:
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:eee:soceco:v:81:y:2019:i:c:p:91-101

DOI: 10.1016/j.socec.2019.05.008

Access Statistics for this article

Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics) is currently edited by Pablo Brañas Garza

More articles in Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics) from Elsevier
Bibliographic data for series maintained by Catherine Liu ().