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Journal of Law, Economics, and Organization Advance Access published online on May 7, 2008
Journal of Law, Economics, and Organization, doi:10.1093/jleo/ewn002
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© The Author 2008. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Auctions Versus Negotiations in Procurement: An Empirical Analysis

Patrick Bajari*

University of Minnesota and NBER

Robert McMillan**

Federal Trade Commission

Steven Tadelis***

University of California, Berkeley

* Department of Economics, University of Minnesota and NBER, 1035 Heller Hall, 271 19th Avenue South, Minneapolis, MN 55455, USA. Email: bajari{at}econ.umn.edu

** Federal Trade Commission, 600 Pennsylvania Avenue, NW Washington, DC 20580. Email: rob.mcmillan{at}gmail.com

*** Haas School of Business, University of California, Berkeley, 545 Student Services Building, CA 94720-1900, USA. Email: stadelis{at}haas.berkeley.edu

Should the buyer of a customized good use competitive bidding or negotiation to select a contractor? To shed light on this question, we consider several possible determinants that may influence the choice of auctions versus negotiations. We then examine a comprehensive data set of private sector building contracts awarded in Northern California during the years 1995–2000. The analysis suggests a number of possible limitations to the use of auctions. Auctions may perform poorly when projects are complex, contractual design is incomplete, and there are few available bidders. Furthermore, auctions may stifle communication between buyers and sellers, preventing the buyer from utilizing the contractor's expertise when designing the project. Some implications of these results for procurement in the public sector are discussed (JEL D23, D82, H57, L14, L22, L74).

We thank Susan Athey, Tim Bresnahan, Jeremy Bulow, Igal Hendel, Matt Kahn, Pueo Keffer, Jon Levin, Scott Masten, John McMillan, Paul Milgrom, Aviv Nevo, Peter Reiss, Ilya Segal, Pablo Spiller, Bob Tatum, and Oliver Williamson for helpful discussions. An editor and two anonymous referees offered excellent comments. This research has been supported by the National Science Foundation, grants SES0112106 and SES0122747 (Patrick Bajari), and SES0079876 (Steven Tadelis), and by the Stanford Institute for Economic Policy Research.


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