Incomplete Contracts in Dynamic Procurement

We analyze the problem of a buyer who purchases a long-term project from one of several suppliers. A changing state of the world influences the costs of the suppliers. Complete contracts conditioning on all future realizations of the state are infeasible. We show that contractual incompleteness comes without a cost. The buyer achieves the same surplus with complete and incomplete contracts. The key insight is that the allocation prescribed by optimal complete contracts is sequentially optimal with incomplete contracts if the buyer does not receive too much information ex-interim. We show that the English auction restricts the information optimally.

Gretschko, Vitali and Martin Pollrich (2019), Incomplete Contracts in Dynamic Procurement, ZEW Discussion Paper No. 19-040, Mannheim.