Abstract

In this paper we study how early-exit options, embedded in long-term procurement contracts which do not provide for sufficiently strong incentives against contract breach, can affect bidding behaviors in multidimensional procurement auctions and the parties' expected payoffs. We show first that bidders' payoff is lower when competing for contracts with unenforceable contract terms. Secondly, that neglecting the risk of opportunistic behavior by sellers can lead to contract awards that do not maximize the buyer's potential payoff. Finally, we make suggestions about how to mitigate potential misallocations, by pointing out the role of eligibility rules and competition among bidders.

Keywords

public procurement; scoring auctions; contract breach; real options; conservation contracts

Published in

Working Paper Series / Swedish University of Agricultural Sciences, Department of Economics
2015, number: 2015:6
Publisher: Department of Economics, Swedish University of Agricultural Sciences

Authors' information