Discussion paper

DP11179 Optimal Cost Overruns: Procurement Auctions and Renegotiation

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.


Herweg, F (2016), ‘DP11179 Optimal Cost Overruns: Procurement Auctions and Renegotiation‘, CEPR Discussion Paper No. 11179. CEPR Press, Paris & London. https://cepr.org/publications/dp11179