Auctions Versus Negotiations in Procurement: An Empirical Analysis

Posted: 22 Sep 2009

See all articles by Patrick Bajari

Patrick Bajari

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Robert Stanton McMillan

Cauchy Capital

Steven Tadelis

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: October 2009

Abstract

Should the buyer of a customized good use competitive bidding or negotiation to select a contractor? To shed light on this question, we consider several possible determinants that may influence the choice of auctions versus 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 possible limitations to the use of auctions. Auctions may perform poorly when projects are complex, contractual design is incomplete, and there are few available bidders. Furthermore, auctions may stifle communication between buyers and 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 (JEL D23, D82, H57, L14, L22, L74).

Suggested Citation

Bajari, Patrick and McMillan, Robert Stanton and Tadelis, Steven, Auctions Versus Negotiations in Procurement: An Empirical Analysis (October 2009). The Journal of Law, Economics, & Organization, Vol. 25, Issue 2, pp. 372-399, 2009, Available at SSRN: https://ssrn.com/abstract=1476645 or http://dx.doi.org/10.1093/jleo/ewn002

Patrick Bajari (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

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Robert Stanton McMillan

Cauchy Capital

Steven Tadelis

University of California, Berkeley - Haas School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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