Goldberg (1977) - Competitive Bidding And The Production Of Precontract Information

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• This page is referenced in BPP Field Exam Papers

Reference(s)

Goldberg, Victor P. (1977) "Competitive Bidding and the Production of Precontract Information," Bell Journal of Economics, 8:250-261 pdf

Abstract

This note is concerned with the effects of contractual complexity on the precontract bidding process. Competitive bidding is seen to be a heterogeneous class of devices for transmitting information between organizations. Even for rather simple contracts (e.g., Demsetz' license plates contract), the purchaser is seldom interested solely in price - he is interested in acquiring and providing information as well. For complex contracts, such as a fifteen-year cable television fran- chise, the information problems tend to dominate. The implications of locating the liability for provision of precontract information on providers and on purchasers are considered.

Short Summary

Competitive bidding exists to transfer information from the bidder to the principal.

• The price provides one information mechanism
• However, other contractual information, such as how the task will be carried out, could be more important than the price alone.
• If there is competitive bidding on price alone, bidders might withhold information in order to hold up the principal later (once they have won the contract)

The questions are therefore:

• How do incentives affect the information that firms provide to the principal
• How should information be compensated.

Suppose for example, that the principal (the purchaser) has a preference for durability of the product as well as price. One solution is to create a scoring rule to force bidders to incorporate both types of information:

[math]s_i = f(b_i, d_i)\,[/math]

where [math]s_i\,[/math] is the score for firm [math]i\,[/math], [math]b_i\,[/math] is their price bid, and [math]d_i\,[/math] is there durability bid. [math]f(\cdot)\,[/math] is a function that weights the inputs according to the principal's requirements.