Auctions vs. Negotiations: The Effects of Inefficient Renegotiation

36 Pages Posted: 9 Apr 2015

See all articles by Fabian Herweg

Fabian Herweg

University of Bayreuth - Faculty of Law, Business and Economics

Klaus M. Schmidt

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

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Date Written: March 31, 2015

Abstract

For the procurement of complex goods the early exchange of information is important to avoid costly renegotiation ex post. We show that this is achieved by bilateral negotiations but not by auctions. Negotiations strictly outperforms auctions if sellers are likely to have superior information about possible design improvements, if renegotiation is costly, and if the buyer’s bargaining position is sufficiently strong. Moreover, we show that negotiations provide stronger incentives for sellers to investigate possible design improvements than auctions. This provides an explanation for the widespread use of negotiations as a procurement mechanism in private industry.

Keywords: auctions, negotiations, procurement, renegotiation, adaptation costs, loss aversion, behavioral contract theory

JEL Classification: D030, D820, D830, H570

Suggested Citation

Herweg, Fabian and Schmidt, Klaus M., Auctions vs. Negotiations: The Effects of Inefficient Renegotiation (March 31, 2015). CESifo Working Paper Series No. 5268, Available at SSRN: https://ssrn.com/abstract=2592351

Fabian Herweg (Contact Author)

University of Bayreuth - Faculty of Law, Business and Economics ( email )

Universitätsstraße 30
Bayreuth, 95447
Germany

Klaus M. Schmidt

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany
+49 89 2180 3405 (Phone)
+49 89 2180 3510 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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