Procurement under public scrutiny: Auctions vs. negotiations

We compare two commonly used mechanisms in public procurement: auctions and negotiations. The execution of the procurement mechanism is delegated to an agent of the buyer. The agent has private information about the buyer’s preferences and may collude with one of the sellers. We provide a general characterization of both mechanisms based on public scrutiny requirements and show – contrary to conventional wisdom – that an intransparent negotiation always yields higher social surplus than a transparent auction. Moreover, there exists a lower bound on the number of sellers such that the negotiation also generates a higher buyer surplus.

Gretschko, Vitali and Achim Wambach (2016), Procurement under public scrutiny: Auctions vs. negotiations, RAND Journal of Economics 47 , 914-934