Procurement under default risk: auctions or lotteries?

Ottorino Chillemi () and Claudio Mezzetti
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Ottorino Chillemi: University of Padova

No 131, "Marco Fanno" Working Papers from Dipartimento di Scienze Economiche "Marco Fanno"

Abstract: We study optimal procurement in the presence of default risk. Contractors differ in the penalty they suffer in case of default, which is private information. If the loss to the procurer from non-completion is high relative to the cost of completion, the optimal mechanism is to assign the project by a fair lottery. The procurer pays the winner enough so that the project is always completed and extracts contractors' surplus by charging them participation fees. When the loss to the procurer from non-completion is low relative to the cost of completion, the project is assigned to the contractor with the highest probability of default; that is, the one with the lowest defaulting penalty. The optimal probability of default is inefficiently low: projects that would be first-best efficient not to complete are completed.

Keywords: procurement; auctions; abnormally low tender; default risk. (search for similar items in EconPapers)
JEL-codes: D44 D82 H57 L51 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2011-03
New Economics Papers: this item is included in nep-cta and nep-ppm
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:pad:wpaper:0131

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