SIEPR Policy
paper No. 02-041
Auctions versus Negotiations in Procurement:
An Empirical Analysis
Patrick Bajari, Robert McMillan and Steven Tadelis
July 2003
Should the buyer of a customized good use competitive bidding or negotiation
to select a contractor? To shed light on this question, we offer a framework that
compares auctions with negotiations. We then examine a comprehensive data set
of private sector building contracts awarded in Northern California during the years
1995-2000. The analysis suggests a number of possible limitations to the use of
auctions. Auctions may perform poorly when projects are complex, contractual
design is incomplete and there are few available bidders. Furthermore, auctions
may stifle communication between buyers and sellers, preventing the buyer from
utilizing the contractor ’s expertise when designing the project. Some implications
of these results for procurement in the public sector are discussed.
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