Auctions vs. Negotiations:The Effects of Inefficient Renegotiation

Herweg, Fabian und Schmidt, Klaus M. (25. November 2014): Auctions vs. Negotiations:The Effects of Inefficient Renegotiation. SFB/TR 15 Discussion Paper No. 484

Abstract

For the procurement of complex goods the early exchange of information is important to avoid costly renegotiation ex post. We show that this is achieved by bilateral negotiations but not by auctions. Negotiations strictly outperforms auctions if sellers are likely to have superior information about possible design improvements, if renegotiation is costly, and if the buyer's bargaining position is sufficiently strong. Moreover, we show that negotiations provide stronger incentives for sellers to investigate possible design improvements than auctions. This provides an explanation for the widespread use of negotiations as a procurement mechanism in private industry.

• Dokumententyp: Paper
• Keywords: Auctions; Negotiations; Procurement; Renegotiation; Adaptation Costs; Loss Aversion; Behavioral Contract Theory.
• Fakultät: Sonderforschungsbereiche > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems ; Sonderforschungsbereiche > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A4 - Unvollständige Verträge, Marktinteraktion und soziale Vergleichsprozesse
• Themengebiete: 300 Sozialwissenschaften > 330 Wirtschaft
• JEL Classification: D03, D82, D83, H57
• Sprache: Englisch