Favoritism, Anonimity and Renegotiation in Procurement

LEANDRO AROZAMENA; JUAN JOSÉ GANUZA; FEDERICO WEINSCHELBAUM

Bahía Blanca

Seminario; Seminario de Economía; 2018

Universidad Nacional del Sur

This paper sheds light on a mechanism for implementing favoritism even in a symmetric framework. We analyze a procurement setting in which the optimal design of the project is unknown. The sponsor has to invest in specifying the project. The larger the investment, the higher the probability that the initial design is optimal. Otherwise, a bargaining process between the winning firm and the sponsor takes place. The bargaining benefits of the winning firm are larger when this is the favored firm. Given this comparative advantage, the favored firm bids more aggressively and then, it wins more often than standard firms. We show that the sponsor invests less in specifying the initial design when favoritism is stronger. Underinvestment in design specification is a tool for giving a comparative advantage to the favored firm.