Working Paper: NBER ID: w9757
Authors: Patrick L. Bajari; Robert S. McMillan; Steve Tadelis
Abstract: Should the buyer of a customized good use competitive bidding or negotiation to select a contractor? To shed light on this question, we offer a framework that compares auctions with negotiations. We then examine a comprehensive data set of private sector building contracts awarded in Northern California during the years 1995-2000. The analysis suggests a number of potential limitations to the use of auctions. Auctions perform poorly when projects are complex, contractual design is incomplete and there are few available bidders. Furthermore, auctions stifle communication between buyers and the sellers, preventing the buyer from utilizing the contractor's expertise when designing the project. Some implications of these results for procurement in the public sector are discussed.
Keywords: No keywords provided
JEL Codes: L0; D23; D82; H57; L14; L22; L74
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fixed-price contracts (D86) | competitive bidding (D44) |
| cost-plus contracts (D86) | negotiations (F51) |
| project complexity (C60) | negotiations (F51) |
| auctions (D44) | poor performance in complex projects (D29) |
| auctions (D44) | communication between buyers and contractors (L14) |
| auctions (D44) | countercyclical use (E32) |
| available contractors (M55) | benefits of auctions (D44) |
| negotiated contracts (L14) | reputable contractors (L74) |