Procurement with Unforeseen Contingencies
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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.
Date: 19 January 2018, 14:15 (Friday, 1st week, Hilary 2018)
Venue: Manor Road Building, Manor Road OX1 3UQ
Venue Details: IT Room
Speaker: Klaus Schmidt (Ludwig-Maximilians-Universität München (LMU))
Organising department: Department of Economics
Part of: Nuffield Economic Theory Seminar
Booking required?: Not required
Audience: Members of the University only
Editors: Erin Saunders, Anne Pouliquen