Favoritism, Anonimity and Renegotiation in Procurement Auctions

LEANDRO AROZAMENA; JUAN JOSÉ GANUZA; FEDERICO WEINSCHELBAUM

Seminario; Seminario mensual de la Red NIE; 2021

Red NIE

This paper sheds light over a mechanism for implementing favoritism even ina symmetric framework. We analyze a procurement setting in which the optimaldesign of the project is unknown. The sponsor has to invest in specifying theproject. The larger the investment, the higher the probability that the initialdesign is optimal. Otherwise, a bargaining process between the winning firm andthe sponsor takes place. The bargaining benefits of the winning firm are largerwhen this is the favored firm. Given this comparative advantage, the favoredfirm bids more aggressively and then, it wins more often than standard firms.Finally, the sponsor invest less in specifying the initial design, the higher is thefavoritism, since underinvestment in design specification is a tool for giving acomparative advantage to the favored firm.