Optimal procurement mechanisms: bidding on price and damages for breach

Chillemi, Ottorino and Mezzetti, Claudio (2014) Optimal procurement mechanisms: bidding on price and damages for breach. Economic Theory, 55 2: 335-355. doi:10.1007/s00199-013-0751-5


Author Chillemi, Ottorino
Mezzetti, Claudio
Title Optimal procurement mechanisms: bidding on price and damages for breach
Journal name Economic Theory   Check publisher's open access policy
ISSN 0938-2259
1432-0479
Publication date 2014-02
Year available 2013
Sub-type Article (original research)
DOI 10.1007/s00199-013-0751-5
Open Access Status Not Open Access
Volume 55
Issue 2
Start page 335
End page 355
Total pages 21
Place of publication Heidelberg, Germany
Publisher Springer
Language eng
Abstract We study the optimal procurement mechanism when contract breach and abandoning a project may be efficient, either because of completion costs higher than anticipated or because of new and more lucrative opportunities for the contractor. When contractors have private information about their costs, the procurer finds it optimal to set damages above expectation damages. There is a lock-in effect, or status quo bias; the agent that has won the award will complete the project even in situations when it would be efficient to abandon it. If the cost types of all agents are above a threshold, the optimal bidding procedure assigns the project by lottery. The optimal mechanism cannot be implemented by standard auction formats. However, the larger the number of agents bidding for the project, the closer auctions with a liquidated damage clause approximate the optimal mechanism.
Keyword Contract breach
Liquidated damages
Principal-agent
Procurement
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status Non-UQ

Document type: Journal Article
Sub-type: Article (original research)
Collection: School of Economics Publications
 
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Created: Thu, 02 Jun 2016, 12:37:19 EST by Karen Warren on behalf of Learning and Research Services (UQ Library)