Why Negotiation with a Single Syndicate May Be Preferred to Making Syndicates Compete: The Problem of Trapped Bidders
Posted: 2 May 2000
We investigate the choice between hiring syndicates through competitive bidding and negotiation. Making syndicates compete can result in inferior terms because of inefficiencies like less effective search, possibly less total search, and trapped bidders. Empirical results are consistent with our hypothesis that purchasing syndicates search less under competition and that competition produces trapped bidders. The results also show that the primary market is rigidly divided under competition. When this occurs, total search under competitive bidding can be less than total search under negotiation. This may explain why competitive bidding is not favored in spite of its lower cost.
JEL Classification: D81, D82
Suggested Citation: Suggested Citation