Bidding for Incomplete Contracts
University of Michigan at Ann Arbor - Economics; National Bureau of Economic Research (NBER)
Duke University - Department of Economics
University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
FEEM Working Paper No. 141.04
When procurement contracts are incomplete, they are frequently changed after the contract is awarded to the lowest bidder. This results in a final cost that differs from the initial price, and may involve significant transaction costs due to renegotiation. We propose a stylized model of bidding for incomplete contracts and apply it to data from highway repair contracts. We estimate the magnitude of transaction costs and their impact using both reduced form and fully structural models. Our results suggest that transactions costs are a significant and important determinant of observed bids, and that bidders strategically respond to contractual incompleteness. Our findings point at disadvantages of the traditional bidding process that are a consequence of transaction costs from contract adaptations.
Number of Pages in PDF File: 48
Keywords: Procurement, Construction
JEL Classification: D23, D82, H57, L14, L22, L74
Date posted: November 26, 2004
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