Bidding for Incompete Contracts

Patrick Bajari, Stephanie Houghton and Steven Tadelis
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Patrick Bajari: Duke University and NBER
Stephanie Houghton: Duke University

No 2004.141, Working Papers from Fondazione Eni Enrico Mattei

Abstract: When procurement contracts are incomplete, they are frequently changed after the contract is awarded to the lowest bidder. This results in a final cost that differs from the initial price, and may involve significant transaction costs due to renegotiation. We propose a stylized model of bidding for incomplete contracts and apply it to data from highway repair contracts. We estimate the magnitude of transaction costs and their impact using both reduced form and fully structural models. Our results suggest that transactions costs are a significant and important determinant of observed bids, and that bidders strategically respond to contractual incompleteness. Our findings point at disadvantages of the traditional bidding process that are a consequence of transaction costs from contract adaptations.

Keywords: Procurement; Construction (search for similar items in EconPapers)
JEL-codes: D23 D82 H57 L14 L22 L74 (search for similar items in EconPapers)
Date: 2004-12
New Economics Papers: this item is included in nep-com, nep-gth and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2004.141

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