Procurement Auctions with Renegotiation and Wealth Constraints

28 Pages Posted: 24 Sep 2013

See all articles by Wei-Shiun Chang

Wei-Shiun Chang

Humboldt University of Berlin

Tim Salmon

Southern Methodist University

Krista J. Saral

The University of North Carolina at Charlotte

Date Written: September 24, 2013

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

JEL Classification: C91, D44, D82

Suggested Citation

Chang, Wei-Shiun and Salmon, Tim and Saral, Krista J., Procurement Auctions with Renegotiation and Wealth Constraints (September 24, 2013). Available at SSRN: https://ssrn.com/abstract=2330106 or http://dx.doi.org/10.2139/ssrn.2330106

Wei-Shiun Chang

Humboldt University of Berlin ( email )

Unter den Linden 6
AK Berlin 10099
Germany

Tim Salmon

Southern Methodist University ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

HOME PAGE: http://faculty.smu.edu/tsalmon/

Krista J. Saral (Contact Author)

The University of North Carolina at Charlotte ( email )

9201 University City Blvd
Charlotte, NC 28223
United States

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