Showing papers by "Klaus M. Schmidt published in 2020"
TL;DR: It is shown that each seller prefers to conceal his information until he is awarded the contract and then renegotiate when he is in a bilateral monopoly position with the buyer, which gives rise to three inefficiencies: inefficient renegotiation, inefficient production and inefficient design.
Abstract: The procurement of complex projects is often plagued by large cost overruns. One important reason for these additional costs are flaws in the initial design. If the project is procured with a price-only auction, sellers who spotted some of the flaws have no incentive to reveal them early. Each seller prefers to conceal his information until he is awarded the contract and then renegotiate when he is in a bilateral monopoly position with the buyer. We show that this gives rise to three inefficiencies: inefficient renegotiation, inefficient production and inefficient design. We derive the welfare optimal direct mechanism that implements the efficient allocation at the lowest possible cost to the buyer. The direct mechanism, however, imposes strong assumptions on the buyer's prior knowledge of possible flaws and their payoff consequences. Therefore, we also propose an indirect mechanism that implements the same allocation but does not require any such prior knowledge. The optimal direct and indirect mechanisms separate the improvement of the design and the selection of the seller who produces the good.
11 citations
TL;DR: This work solves for the optimal Bayesian procurement mechanism that implements the efficient allocation under the constraint that sellers are protected by limited liability and shows that the rents obtained from reporting costs truthfully can be used to reduce the rents sellers must get for reporting the flaw.
4 citations