Auctions vs. Negotiations: The Case of Favoritism

Vitali Gretschko and Achim Wambach

No 4045, CESifo Working Paper Series from CESifo

Abstract: We compare two commonly used mechanisms in procurement: auctions and negotiations. The execution of the procurement mechanism is delegated to an agent of the buyer. The agent has private information about the buyer’s preferences and may collude with one of the sellers. We provide a precise definition of both mechanisms and show – contrary to conventional wisdom – that an intransparent negotiation yields a higher buyer surplus than a transparent auction for a range of parameters. In particular, for small expected punishments there exists a lower and an upper bound on the number of sellers such that the negotiation yields a higher buyer surplus with a probability arbitrary close to 1 in the parameter space. Moreover, if the expected punishment is small, the negotiation is always more efficient and generates a higher surplus for the sellers.

Keywords: corruption; auctions; negotiations; public procurement (search for similar items in EconPapers)
JEL-codes: D44 D73 H57 L13 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Auctions vs. Negotiations: The Case of Favoritism (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_4045

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