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Sequential Procurement Auctions and Their Effect on Investment Decisions

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  • Nicolás Figueroa
  • Gonzalo Cisternas

Abstract

In this paper we characterize the optimal procurement mechanism and the investment level for an environment where two projects must be adjudicated sequentially, and the winner of the first project has the opportunity to invest in a distributional upgrade for its costs in the second project. We study 4 cases, based on the commitment level of the seller and the observability of the investment decision. We find that with commitment, the second period mechanism gives an advantage to the first period winner, and induces an investment level that is greater than the efficient one. With non-commitment, the second period mechanism gives a disadvantage to the first period winner, and induces an investment level that is smaller than the efficient one. Observability is irrelevant in the commitment case, but makes the effects more pronounced in the non-commitment case.

Suggested Citation

  • Nicolás Figueroa & Gonzalo Cisternas, 2007. "Sequential Procurement Auctions and Their Effect on Investment Decisions," Documentos de Trabajo 230, Centro de Economía Aplicada, Universidad de Chile.
    • Handle: RePEc:edj:ceauch:230
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    References listed on IDEAS

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    1. Luton, Richard & McAfee, R. Preston, 1986. "Sequential procurement auctions," Journal of Public Economics, Elsevier, vol. 31(2), pages 181-195, November.
    2. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
    3. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Dasgupta, Sudipto, 1990. "Competition for Procurement Contracts and Underinvestment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(4), pages 841-865, November.
    5. Jean-Jacques Laffont & Jean Tirole, 1988. "Repeated Auctions of Incentive Contracts, Investment, and Bidding Parity with an Application to Takeovers," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 516-537, Winter.
    6. Paul Klemperer, 2004. "Auctions: Theory and Practice," Online economics textbooks, SUNY-Oswego, Department of Economics, number auction1.
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    Citations

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    Cited by:

    1. Rosar, Frank & Mueller, Florian, 2014. "Negotiating cultures in corporate procurement," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100599, Verein für Socialpolitik / German Economic Association.
    2. Asseyer, Andreas, 2018. "Optimal monitoring in dynamic procurement contracts," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 222-252.
    3. Barbosa, Klenio & Boyer, Pierre C., 2021. "Discrimination in Dynamic Procurement Design with Learning-by-doing," International Journal of Industrial Organization, Elsevier, vol. 77(C).
    4. Andreas Asseyer, "undated". "Optimal monitoring in dynamic procurement contracts," BDPEMS Working Papers 2015002, Berlin School of Economics.
    5. Qian, Xiaohu & Fang, Shu-Cherng & Huang, Min & Wang, Xingwei, 2019. "Winner determination of loss-averse buyers with incomplete information in multiattribute reverse auctions for clean energy device procurement," Energy, Elsevier, vol. 177(C), pages 276-292.
    6. Gonzalo Cisternas & Nicolás Figueroa, 2007. "A Note on the Comparative Statics of Optimal Procurement Auctions," Documentos de Trabajo 240, Centro de Economía Aplicada, Universidad de Chile.
    7. Can Urgun, 2021. "Restless Contracting," Working Papers 2021-88, Princeton University. Economics Department..
    8. Goudarzi, Fatemeh (Sahar) & Olaru, Doina & Bergey, Paul, 2023. "Beyond risk attitude: Unpacking behavioral drivers of supply chain contracts," International Journal of Production Economics, Elsevier, vol. 255(C).
    9. Merckx, Gilles & Chaturvedi, Aadhaar, 2020. "Short vs. long-term procurement contracts when supplier can invest in cost reduction," International Journal of Production Economics, Elsevier, vol. 227(C).
    10. Murali Agastya & Oleksii Birulin, 2023. "Optimal Task Scheduling under Adverse Selection and Hidden Actions," American Economic Journal: Microeconomics, American Economic Association, vol. 15(2), pages 660-698, May.
    11. Zhang, Heng & Yang, Ming & Bao, Jiye & Gong, Pu, 2013. "Competitive investing equilibrium under a procurement mechanism," Economic Modelling, Elsevier, vol. 31(C), pages 734-738.

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