DP11179 | Optimal Cost Overruns: Procurement Auctions and Renegotiation

Publication Date

03/20/2016

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Abstract

Cost overrun is ubiquitous in public procurement. We argue that this can be the result of a constraint optimal award procedure when the procurer cannot commit not to renegotiate. If cost differences are more pronounced for more complex designs, it is optimal to fix a simple design ex ante and to renegotiate to a more complex and costlier design ex post. Specifying a simple design initially enhances competition in the auction. Moreover, the procurer cannot benefit from using a multi-dimensional auction, as the optimal scoring rule depends only on the price.