Precontractual Investment and Modes of Procurement
56 Pages Posted: 22 Feb 2018
Date Written: February 11, 2018
Consider a repeated game in which a buyer must decide whether to procure goods whose design may prove defective through auctions or negotiations. To reduce the likelihood of failure, the buyer must motivate the potential suppliers to make a precontractual investment. Because the noisy signal of the supplier's investment is non-verifiable the buyer can induce the suppliers to invest only through relational contracts. I find that auctions may not enable the buyer to implement a surplus-increasing relational contract even when the players are very patient. Therefore, negotiations may be adopted, since they are more effective in stimulating the supplier's investment.
Keywords: Auctions, Negotiations, Precontractual Investment, Procurement, Relational Contracts
JEL Classification: D82, D86, L14, L22
Suggested Citation: Suggested Citation