Auctioning IT Contracts with Renegotiable Scope

Forthcoming in Management Science

67 Pages Posted: 27 Aug 2021

See all articles by He Huang

He Huang

Chongqing University - School of Economics and Business Administration

Zhipeng Li

Nanchang University - School of Economics and Management

De Liu

University of Minnesota - Minneapolis

Hongyan XU

Chongqing University - School of Economics and Business Administration

Date Written: August 23, 2021

Abstract

Motivated by challenges facing IT procurement, this paper studies a hybrid procurement model where a reverse auction of a fixed-price IT outsourcing contract may be followed by renegotiation to extend the contract's scope. In this model, the buyer balances the need to incentivize non-contractible vendor investment and the need to curb the winning vendor's information rent, by choosing the initial project scope and her investment in the quality of the project. We find that a buyer may benefit from inducing ex-post renegotiation to motivate vendor investment, especially when the winning vendor has high bargaining power and the quality uncertainty is low. Broadening the initial scope reduces information rent but leaves little room for ex-post renegotiation and hence discourages vendor investment, whereas increasing the buyer's investment has opposite effects. Interestingly, the two measures can be strategic substitutes or complements depending on the likelihood of the renegotiation and the two parties' bargaining powers. The buyer may strategically set low initial project scope and high investment to incentivize renegotiation and vendor investment, which may explain why many IT outsourcing projects start small and allow expansions. Our findings also generate several testable predictions for IT outsourcing.

Keywords: IT outsourcing; renegotiation; specific investments; reverse auctions; incomplete contract

JEL Classification: D23, D42, D44, D82, D86, L14,

Suggested Citation

Huang, He and Li, Zhipeng and Liu, De and XU, Hongyan, Auctioning IT Contracts with Renegotiable Scope (August 23, 2021). Forthcoming in Management Science, Available at SSRN: https://ssrn.com/abstract=3910016

He Huang

Chongqing University - School of Economics and Business Administration ( email )

Shazheng Str 174, Shapingba District
Chongqing, Chongqing 400030
China

Zhipeng Li

Nanchang University - School of Economics and Management ( email )

999 Xuefu Avenue
Hong Gu Tan New District
Nanchang, Jiangxi 330031
China

De Liu (Contact Author)

University of Minnesota - Minneapolis ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States

Hongyan XU

Chongqing University - School of Economics and Business Administration ( email )

No.174 Shazhengjie
Shapingba
Chongqing, Chongqing 400044
China

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
82
Abstract Views
345
Rank
543,153
PlumX Metrics