Auctions Versus Negotiations in Procurement: An Empirical Analysis
Patrick Bajari, Robert S. McMillan, Steve Tadelis
NBER Working Paper No. 9757
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.
Document Object Identifier (DOI): 10.3386/w9757
Published: Bajari, Patrick, Steve Tadelis, and Rob McMillan. "Auctions versus Negotiations in Procurement: An Empirical Analysis." Journal of Law, Economics and Organization 25, 2 (2009): 372-399.
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