Auctions vs. Negotiations: The Case of Favoritism

27 Pages Posted: 3 Jan 2013

See all articles by Vitali Gretschko

Vitali Gretschko

ZEW – Leibniz Centre for European Economic Research

Achim Wambach

ZEW – Leibniz Centre for European Economic Research; University of Mannheim; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: December 28, 2012

Abstract

We compare two commonly used mechanisms in procurement: auctions and negotiations. The execution of the procurement mechanism is delegated to an agent of the buyer. The agent has private information about the buyer’s preferences and may collude with one of the sellers. We provide a precise definition of both mechanisms and show – contrary to conventional wisdom – that an intransparent negotiation yields a higher buyer surplus than a transparent auction for a range of parameters. In particular, for small expected punishments there exists a lower and an upper bound on the number of sellers such that the negotiation yields a higher buyer surplus with a probability arbitrary close to 1 in the parameter space. Moreover, if the expected punishment is small, the negotiation is always more efficient and generates a higher surplus for the sellers.

Keywords: corruption, auctions, negotiations, public procurement

JEL Classification: D440, D730, L130, H570

Suggested Citation

Gretschko, Vitali and Wambach, Achim, Auctions vs. Negotiations: The Case of Favoritism (December 28, 2012). CESifo Working Paper Series No. 4045, Available at SSRN: https://ssrn.com/abstract=2195517

Vitali Gretschko

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Achim Wambach (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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