Bundling Decision in Procurement Auctions with Risk-Averse Suppliers

Takeshi Nishimura

Global COE Hi-Stat Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: In a two-stage procurement model, we compare two contracting schemes: bundling and unbundling. They differ in whether two sequential tasks of investment and service provision are bundled or not in the auction. We show that while unbundling causes underinvestment in cost reduction and bundling causes the ex post inefficiency of trade, each scheme imposes some forms of risk on the suppliers. The comparative statics results show that as the investment is more costly and/or a common cost component is more risky, bundling becomes less attractive to both the buyer and society.

Date: 2012-07
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