IDEAS home Printed from https://ideas.repec.org/a/bla/randje/v53y2022i4p733-762.html
   My bibliography  Save this article

On advance payments in tenders with budget constrained contractors

Author

Listed:
  • Oleksii Birulin
  • Sergei Izmalkov

Abstract

We consider procurement auctions in settings where potential contractors have limited funds and face ex post risks, that is, cost overruns that can lead to the contractors' defaults. The bidding strategies and the default decisions are shaped by the incentive—willing to finish—constraints, and the resource—able to finish and feasibility—constraints. We examine payment schemes where the advance share of the award is paid immediately after the auction with the rest payable upon successful completion of the project. We identify the trade‐offs the procurer faces when choosing among such schemes, and explore the factors that influence the optimal advance share.

Suggested Citation

  • Oleksii Birulin & Sergei Izmalkov, 2022. "On advance payments in tenders with budget constrained contractors," RAND Journal of Economics, RAND Corporation, vol. 53(4), pages 733-762, December.
  • Handle: RePEc:bla:randje:v:53:y:2022:i:4:p:733-762
    DOI: 10.1111/1756-2171.12428
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1756-2171.12428
    Download Restriction: no

    File URL: https://libkey.io/10.1111/1756-2171.12428?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Ottorino Chillemi & Claudio Mezzetti, 2014. "Optimal procurement mechanisms: bidding on price and damages for breach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(2), pages 335-355, February.
    2. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
    3. Burguet, Roberto & Ganuza, Juan-José & Hauk, Esther, 2012. "Limited liability and mechanism design in procurement," Games and Economic Behavior, Elsevier, vol. 76(1), pages 15-25.
    4. David Seth Jones, 2011. "Recent reforms to promote social responsibility procurement in east asian states: a comparative analysis," Journal of Public Procurement, Emerald Group Publishing Limited, vol. 11(1), pages 61-94, March.
    5. Zheng, Charles Z., 2001. "High Bids and Broke Winners," Journal of Economic Theory, Elsevier, vol. 100(1), pages 129-171, September.
    6. Waehrer Keith, 1995. "A Model of Auction Contracts with Liquidated Damages," Journal of Economic Theory, Elsevier, vol. 67(2), pages 531-555, December.
    7. Francesco Decarolis, 2018. "Comparing Public Procurement Auctions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 391-419, May.
    8. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Auctioning Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 921-937, October.
    9. Lisa Chever & Stéphane Saussier & Anne Yvrande-Billon, 2017. "The law of small numbers: investigating the benefits of restricted auctions for public procurement," Applied Economics, Taylor & Francis Journals, vol. 49(42), pages 4241-4260, September.
    10. Sarah Parlane, 2003. "Procurement Contracts under Limited Liability," The Economic and Social Review, Economic and Social Studies, vol. 34(1), pages 1-21.
    11. R. Preston McAfee & John McMillan, 1986. "Bidding for Contracts: A Principal-Agent Analysis," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 326-338, Autumn.
    12. Matthew Rhodes-Kropf & S. Viswanathan, 2005. "Financing Auction Bids," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 789-815, Winter.
    13. Anat R. Admati & Motty Perry, 1991. "Joint Projects without Commitment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 259-276.
    14. , & ,, 2006. "Revenue comparisons for auctions when bidders have arbitrary types," Theoretical Economics, Econometric Society, vol. 1(1), pages 95-118, March.
    15. Elena Krasnokutskaya & Katja Seim, 2011. "Bid Preference Programs and Participation in Highway Procurement Auctions," American Economic Review, American Economic Association, vol. 101(6), pages 2653-2686, October.
    16. Yeon-Koo Che & Ian Gale, 1998. "Standard Auctions with Financially Constrained Bidders," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(1), pages 1-21.
    17. Birulin, Oleksii, 2020. "Optimality of simple procurement auctions," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    18. Yuhua Qiao & Khi V. Thai & Glenn Cummings, 2009. "State and local procurement preferences: A survey," Journal of Public Procurement, Emerald Group Publishing Limited, vol. 9(3/4), pages 371-410, March.
    19. Watson, Joel, 1999. "Starting Small and Renegotiation," Journal of Economic Theory, Elsevier, vol. 85(1), pages 52-90, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Leonardo M. Giuffrida & Gabriele Rovigatti, 2022. "Supplier selection and contract enforcement: Evidence from performance bonding," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(4), pages 980-1019, November.
    2. Lagziel, David, 2019. "Credit auctions and bid caps," Games and Economic Behavior, Elsevier, vol. 113(C), pages 416-422.
    3. Skrzypacz, Andrzej, 2013. "Auctions with contingent payments — An overview," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 666-675.
    4. Birulin, Oleksii, 2020. "Optimality of simple procurement auctions," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    5. Ottorino Chillemi & Claudio Mezzetti, 2014. "Optimal procurement mechanisms: bidding on price and damages for breach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(2), pages 335-355, February.
    6. Sano, Ryuji, 2023. "Post-auction investment by financially constrained bidders," Journal of Economic Theory, Elsevier, vol. 213(C).
    7. Lorentziadis, Panos L., 2016. "Optimal bidding in auctions from a game theory perspective," European Journal of Operational Research, Elsevier, vol. 248(2), pages 347-371.
    8. Indranil Chakraborty & Fahad Khalil & Jacques Lawarree, 2021. "Competitive procurement with ex post moral hazard," RAND Journal of Economics, RAND Corporation, vol. 52(1), pages 179-206, March.
    9. Burguet, Roberto & Ganuza, Juan-José & Hauk, Esther, 2012. "Limited liability and mechanism design in procurement," Games and Economic Behavior, Elsevier, vol. 76(1), pages 15-25.
    10. Wei-Shiun Chang & Timothy C. Salmon & Krista J. Saral, 2016. "Procurement Auctions With Renegotiation And Wealth Constraints," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1684-1704, July.
    11. Burkett, Justin, 2015. "Endogenous budget constraints in auctions," Journal of Economic Theory, Elsevier, vol. 158(PA), pages 1-20.
    12. Kotowski, Maciej H., 2020. "First-price auctions with budget constraints," Theoretical Economics, Econometric Society, vol. 15(1), January.
    13. Pagnozzi, Marco & Saral, Krista J., 2019. "Auctions with limited liability through default or resale," Journal of Economic Behavior & Organization, Elsevier, vol. 159(C), pages 51-74.
    14. Lorentziadis, Panos L., 2014. "Bidding under auctioneer default risk," Omega, Elsevier, vol. 49(C), pages 123-133.
    15. Bobkova, Nina, 2020. "Asymmetric budget constraints in a first-price auction," Journal of Economic Theory, Elsevier, vol. 186(C).
    16. François MARECHAL, 2003. "Should we base procurement rules on the competition of linear incentive contracts ?," Cahiers de Recherches Economiques du Département d'économie 03.07, Université de Lausanne, Faculté des HEC, Département d’économie.
    17. Barbosa, Klenio, 2009. "Free Riding in Procurement Design," TSE Working Papers 09-128, Toulouse School of Economics (TSE).
    18. David Martimort & Flavio Menezes & Myrna Wooders & FLÁVIO MENEZES & MATTHEW RYAN, 2015. "Default and Renegotiation in Public-Private Partnership Auctions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 49-77, February.
    19. Zheng, Charles Zhoucheng, 2010. "Debt- Versus Equity-Financing in Auction Designs," Staff General Research Papers Archive 31517, Iowa State University, Department of Economics.
    20. Quintero Jaramillo, Jose E., 2004. "Liquidity constraints and credit subsidies in auctions," DEE - Working Papers. Business Economics. WB wb040604, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:randje:v:53:y:2022:i:4:p:733-762. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/randdus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.