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Goldberg (1977) - Competitive Bidding And The Production Of Precontract Information (view source)
Revision as of 18:25, 31 May 2010
, 18:25, 31 May 2010no edit summary
==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.
