Competition for procurement contracts and underinvestment

Dasgupta, Sudipto (1990) Competition for procurement contracts and underinvestment. International Economic Review, 31 (4). pp. 841-865. ISSN 0020-6598

Abstract

A two-period model is considered in which ex ante identical firms invest in period one, and in period two, after they learn their costs, the lowest cost firm is chosen as the winner of the contract. It is found that even though firms are racing against one another, they end up underinvesting relative to the ex ante socially optimal levels when the buyer is unable to credibly precommit to the second period contract.