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Duke Economics Working Paper #02-35

Piecewise Procurement of a Large-Scale Project


Huseyin Yildirim

Abstract

This paper studies the optimal procurement of a large-scale project. The project consists of several subprojects to be procured in a predetermined order and yields its full return upon completion. In the unique Markov perfect equilibrium of the dynamic procurement game, I find that: (1) Even though the procurer lacks long term commitment power, both the procurer and suppliers strictly prefer the project to move forward; (2) unlike the static setting, the procurer’s optimal strategy depends on the number of suppliers and more importantly, it is nonmonotonic. As one more supplier participates in the procurement auction, the procurer softens competition in the initial stages by including more cost “types” while increasing competition in the mature stages, (3) this, in turn, implies that existing suppliers might favor participation of additional suppliers, (4) the procurer prefers to deal with long-sighted suppliers only if the project is sufficiently large. Otherwise, small-scale projects are better matched with short-sighted suppliers.

Key Words: Large-Scale Projects, Sequential Auctions, Dynamic Programming

JEL: H57, D44, D82

Note: This paper was formerly posted under the title "Sequential Procurement of a Long-Term Project."

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