Procurement Auctions with Renegotiation and Wealth Constraints

Wei-Shiun Chang, Timothy C. Salmon and Krista Jabs Saral

MPRA Paper from University Library of Munich, Germany

Abstract: Renegotiation is a common practice in procurement auctions which allows for post-auction price adjustments and is nominally intended to deal with the problem that sellers might underestimate the eventual costs of a project during the auction. Using a combination of theory and experiments, we examine the effectiveness of renegotiation at solving this problem. Our findings demonstrate that renegotiation is rarely successful at solving the problem of sellers misestimating costs. The primary effect of allowing renegotiation is that it advantages sellers who possess a credible commitment of default should they have underbid the project. Renegotiation allows these weaker types of sellers to win more often and it also allows them to leverage their commitment of default into higher prices in renegotiation from a buyer.

Keywords: Procurement auctions; renegotiation; bankruptcy; default; economic experiments (search for similar items in EconPapers)
JEL-codes: C9 C91 D44 D47 D82 (search for similar items in EconPapers)
Date: 2013-08
New Economics Papers: this item is included in nep-com, nep-exp, nep-mic and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: PROCUREMENT AUCTIONS WITH RENEGOTIATION AND WEALTH CONSTRAINTS (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:50137

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