Managing Project Failure Risk Through Contingent Contracts In Procurement Auctions

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Executive Summary

Procurement auctions are sometimes plagued with a chosen supplier's failing to accomplish a project successfully. The risk of project failure is considerable, especially when the buyer has inadequate information about suppliers ex ante and the project can only be evaluated at the end. To manage such uncertainty, a model of competitive procurement and contracting for a project is presented in this paper. The author studies settings in which suppliers differ in both the costs to fulfill the project and the types reflecting their success probabilities.

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