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Discussion Paper Details

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Title: Auctions vs. Negotiations: The Effects of Inefficient Renegotiation

Author(s): Fabian Herweg and Klaus M. Schmidt

Publication Date: December 2014

Keyword(s): adaptation costs, auctions, behavioral contract theory, loss aversion, negotiations, procurement and renegotiations

Programme Area(s): Industrial Organization

Abstract: For the procurement of complex goods the early exchange of information is important to avoid costly renegotiation ex post. We show that this is achieved by bilateral negotiations but not by auctions. Negotiations strictly outperforms auctions if sellers are likely to have superior information about possible design improvements, if renegotiation is costly, and if the buyer's bargaining position is sufficiently strong. Moreover, we show that negotiations provide stronger incentives for sellers to investigate possible design improvements than auctions. This provides an explanation for the widespread use of negotiations as a procurement mechanism in private industry.

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Bibliographic Reference

Herweg, F and Schmidt, K. 2014. 'Auctions vs. Negotiations: The Effects of Inefficient Renegotiation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10284