Auctions versus negotiations : the effects of inefficient renegotiation

Title data

Herweg, Fabian ; Schmidt, Klaus M.:
Auctions versus negotiations : the effects of inefficient renegotiation.
In: The RAND Journal of Economics. Vol. 48 (2017) Issue 3 . - pp. 647-672.
ISSN 1756-2171
DOI: https://doi.org/10.1111/1756-2171.12189

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Abstract in another language

For the procurement of complex goods the early exchange of information is important to avoid costly renegotiation. If the buyer can specify the main characteristics of possible design improvements in a complete contingent contract, scoring auctions implement the effcient allocation. If this is not feasible, the buyer must choose between a price-only auction (discouraging early information exchange) and bilateral negotiations with a preselected seller (reducing
competition). Bilateral negotiations are superior if potential design improvements are important, if renegotiation is very costly, and if the buyer's bargaining position is strong. Moreover, negotiations provide stronger incentives for sellers to investigate design improvements.