DP11179 Optimal Cost Overruns: Procurement Auctions and Renegotiation
|Author(s):||Fabian Herweg, Marco A. Schwarz|
|Publication Date:||March 2016|
|Keyword(s):||Auction, Cost Overrun, Procurement, Renegotiation|
|JEL(s):||D44, D82, H57|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=11179|
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.