Auctioning Long-Term Projects under Financial Constraints

Malin Arve and David Martimort
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Malin Arve: NHH - Norwegian School of Economics and Business Administration, Department of Economics - Norwegian School of Economics and Business Administration

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Abstract: We consider a procurement auction for the provision of a basic service to which an add-on must later be appended. Potential providers are symmetric, have private information on their cost for the basic service and the winning firm must also implement the add-on. To finance cost-reducing activities related to the add-on, this firm may need extra funding by outside financiers. Non-verifiable effort in reducing these costs creates a moral hazard problem which makes the firm's payoff function for the second period concave in returns over the relevant range. This concavity has two effects: It makes it more attractive to backload payments to facilitate information revelation and uncertainty on the cost of the add-on introduces a background risk which requires a risk premium. In this context, we characterize the optimal intertemporal structure of payments to the winning firm, equilibrium bidding behavior and reserve prices in the first-price auction with bidders.

Keywords: Auctions; Procurement; Financial constraints; Dynamic mechanism design; Asymmetric information; Uncertainty; Endogenous risk aversion. (search for similar items in EconPapers)
Date: 2024-11-08
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Working Paper: Auctioning long-term projects under financial constraints (2024)
Working Paper: Auctioning Long-Term Projects under Financial Constraints (2024)
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