Scandinavian Working Papers in Economics

Working Paper Series,
Swedish University of Agricultural Sciences, Department Economics

No 2015:6: Multidimensional auctions for long-term procurement contracts under the threat of early exit: the case of conservation auctions

Luca Di Corato (), Cesare Dosi () and Michele Moretto ()
Additional contact information
Luca Di Corato: Department of Economics, Swedish University of Agricultural Sciences, Postal: Department of Economics, Swedish University of Agricultural Sciences, Uppsala, Sweden
Cesare Dosi: Department of Economics and Management, University of Padova, Postal: Department of Economics and Management , University of Padova, Via Del Santo, 33 – 35123 Padova, Italy
Michele Moretto: Department of Economics and Management, University of Padova, Postal: Department of Economics and Management , University of Padova, Via Del Santo, 33 – 35123 Padova, Italy

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

JEL-codes: C61; D44; D86; Q24; Q28

35 pages, August 30, 2015

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