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Title: Optimal Cost Overruns: Procurement Auctions and Renegotiation

Author(s): Fabian Herweg and Marco A. Schwarz

Publication Date: March 2016

Keyword(s): Auction, Cost Overrun, Procurement and Renegotiation

Programme Area(s): Industrial Organization

Abstract: Cost overrun is ubiquitous in public procurement. We argue that this can be the result of a constraint optimal award procedure when the procurer cannot commit not to renegotiate. If cost differences are more pronounced for more complex designs, it is optimal to fix a simple design ex ante and to renegotiate to a more complex and costlier design ex post. Specifying a simple design initially enhances competition in the auction. Moreover, the procurer cannot benefit from using a multi-dimensional auction, as the optimal scoring rule depends only on the price.

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Bibliographic Reference

Herweg, F and Schwarz, M. 2016. 'Optimal Cost Overruns: Procurement Auctions and Renegotiation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11179