Auctions Versus Negotiations in Procurement: An Empirical Analysis
31 Pages Posted: 15 Jan 2003
Date Written: October 18, 2002
Should the buyer of a customized good use competitive bidding or negotiation to select a contractor? To shed light on this question, we offer a framework that compares auctions with 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 limitations to the use of auctions. Auctions perform poorly when projects are complex and contractual design is incomplete. Furthermore, auctions stifle communication between buyers and the 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.
Keywords: auctions, negotiations, complexity, incomplete contracts, incentives, transaction costs
JEL Classification: D23, D82, H57, L14, L22, L74
Suggested Citation: Suggested Citation