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Job market paper

Uncertainty and Incomplete Contracts in Procurements

When a buyer is uncertain whether a good/service design can fulfill the need, he/she is unable to write a complete contract, which may lead to a costly modification ex-post. In this paper, I study how the buyer's uncertainty affects the seller-selection process and contract price. The buyer tries to maximize his/her expected payoff by choosing a selection process and subsequently negotiating a price that accounts for the hold-up cost and the cost of modification. I gather a sample of federal service procurement contracts solicited through either a competitive or a non-competitive process with modifications observed ex-post. Empirically, to solve the selection issue, I adapt the Extended Roy Model with the anticipated ex-ante uncertainty of procuring officer estimated at the first step. I find that with more sophisticated design of the service, more market competition, and less bargaining power held by the procuring officer, it is more likely that the service will be procured through a competitive process. Moreover, ceteris paribus, prices tend to be higher in services procured through the non-competitive process than those procured through the competitive process.

Fields

Industrial organization, Public economics