Optimal Cost Overruns: Procurement Auctions with Renegotiation

Arbeitspapier

Cost overrun is ubiquitous in public procurement. We argue that this can be the result of a constrained optimal award procedure: The procurer awards the contract via a price-only auction and cannot commit not to renegotiate. If cost differences are more pronounced for a fancy than a standard design, it is optimal to fix the standard design ex ante. If renegotiation takes place and the fancy design has higher production costs or the contractor\'s bargaining position is strong, the final price exceeds the initial price. Moreover, the procurer cannot benefit from using a multi-dimensional auction, i.e., under the optimal scoring auction each supplier proposes the standard design.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper ; No. 56

Classification and Topics

• Classification: Wirtschaft ; Auctions ; Asymmetric and Private Information; Mechanism Design ; National Government Expenditures and Related Policies: Procurement
• Subject: auction ; cost overrun ; procurement ; renegotiation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Herweg, Fabian ; Schwarz, Marco A.
• Event: Veröffentlichung
• (who): Ludwig-Maximilians-Universität München und Humboldt-Universität zu Berlin, Collaborative Research Center Transregio 190 - Rationality and Competition
• (where): München und Berlin
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/185726
• Last update: 10.03.2025, 11:43 AM CET