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Bidding for Incomplete Contracts

48 Pages Posted: 26 Nov 2004  

Patrick Bajari

University of Michigan at Ann Arbor - Economics; National Bureau of Economic Research (NBER)

Stephanie Houghton

Independent

Steven Tadelis

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: December 2004

Abstract

When procurement contracts are incomplete, they are frequently changed after the contract is awarded to the lowest bidder. This results in a final cost that differs from the initial price, and may involve significant transaction costs due to renegotiation. We propose a stylized model of bidding for incomplete contracts and apply it to data from highway repair contracts. We estimate the magnitude of transaction costs and their impact using both reduced form and fully structural models. Our results suggest that transactions costs are a significant and important determinant of observed bids, and that bidders strategically respond to contractual incompleteness. Our findings point at disadvantages of the traditional bidding process that are a consequence of transaction costs from contract adaptations.

Keywords: Procurement, Construction

JEL Classification: D23, D82, H57, L14, L22, L74

Suggested Citation

Bajari, Patrick and Houghton, Stephanie and Tadelis, Steven, Bidding for Incomplete Contracts (December 2004). FEEM Working Paper No. 141.04. Available at SSRN: https://ssrn.com/abstract=624442 or http://dx.doi.org/10.2139/ssrn.624442

Patrick Bajari (Contact Author)

University of Michigan at Ann Arbor - Economics ( email )

266 Lorch Hall
Ann Arbor, MI 48109
United States
734-763-5319 (Phone)

HOME PAGE: http://www-personal.umich.edu/~bajari/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stephanie Houghton

Independent

No Address Available

Steven Tadelis

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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