Precontractual Investment and Modes of Procurement

56 Pages Posted: 22 Feb 2018

See all articles by Alessandro De Chiara

Alessandro De Chiara

Central European University (CEU) - Department of Economics; University of Barcelona; University of Barcelona - Barcelona Economic Analysis Team (BEAT)

Date Written: February 11, 2018

Abstract

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

De Chiara, Alessandro, Precontractual Investment and Modes of Procurement (February 11, 2018). Available at SSRN: https://ssrn.com/abstract=3118522 or http://dx.doi.org/10.2139/ssrn.3118522

Alessandro De Chiara (Contact Author)

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

University of Barcelona - Barcelona Economic Analysis Team (BEAT) ( email )

Gran Via de les Corts Catalanes
Barcelona, 08007
Spain

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