Limited Liability and Mechanism Design in Procurement

In the presence of cost uncertainty, limited liability introduces the possibility of default in procurement with its associated bank-ruptcy costs. When financial soundness is not perfectly observable, we show that incentive compatibility implies that financially less sound contractors are selected with higher probability in any feasible mechanism. Informational rents are associated with unsound financial situations. By selecting the financially weakest contractor, stronger price competition (auctions) may not only increase the probability of default but also expected rents. Thus, weak conditions are suffcient for auctions to be suboptimal. In particular, we show that pooling firms with higher assets may reduce the cost of procurement even when default is costless for the sponsor.Procurement, limited liability, bankruptcy

Limited liability and mechanism design in procurement

In the presence of cost uncertainty, limited liability introduces the possibility of default in procurement with its associated bank-ruptcy costs. When financial soundness is not perfectly observable, we show that incentive compatibility implies that financially less sound contractors are selected with higher probability in any feasible mechanism. Informational rents are associated with unsound financial situations. By selecting the financially weakest contractor, stronger price competition (auctions) may not only increase the probability of default but also expected rents. Thus, weak conditions are suffcient for auctions to be suboptimal. In particular, we show that pooling firms with higher assets may reduce the cost of procurement even when default is costless for the sponsor

Abnormally Low Tenders in Non-pricing Criteria: the Need for Control

[EN] As public procurement accounts for approximately 10 to 15% of gross domestic product (GDP) in developed countries, tendering mechanisms should be clearly defined in order to avoid any actions that could endanger the basic principle that all bidders should be on equal terms. An Abnormally Low Tender (ALT) is defined as an offer too low to provide a normal level of profit and that cannot be explained on the basis of construction methods, the technical solution chosen, the originality of the work, or the favorable conditions of the tenderer. Public bodies are well aware of the risk of accepting an offer that cannot be carried out and despite the difficulty of detection recommendations for their prevention usually focus on the price criterion. Most tenders are awarded to the economically most advantageous tender (EMAT), which is assessed by various criteria (including price), though other criteria often have equal or greater weight in the final decision. The method used in this research study is divided into two main phases. First, the score of the bidders is obtained for criteria evaluated by formulae other than price, based on the contract terms of three case studies, after which new scores for these award criteria are obtained from ALT formulae, then, the results of both scoring methods are analyzed. This paper defends the need to control abnormally low tenders by means of award criteria evaluated by formulae other than those of price.Fuentes Bargues, JL.; González-Cruz, M.; González-Gaya, C. (2016). Abnormally Low Tenders in Non-pricing Criteria: the Need for Control. Universal Journal of Management. 4(12):659-669. doi:10.13189/ujm.2016.041202S65966941

Report: 2009 and 2010

This booklet gives an overview of the research activities at the IAE (Institute for Economic Analysis) in 2007 and 2008. As a research institute of the CSIC (Higher Council for Scientific Research), the mission of the IAE is to produce policy-relevant research in economics with the highest standard of academic scholarship, and to train young researchers.N

Simple contracts with adverse selection and moral hazard

We study a principal-agent model with moral hazard and adverse selection. Risk-neutral agents with limited liability have arbitrary private information about the distribution of outputs and the cost of effort. We show that under a multiplicative separability condition, the optimal mechanism offers a single contract. This condition holds, for example, when output is binary. If the principal’s payoff must also satisfy free disposal and the distribution of outputs has the monotone likelihood ratio property, the mechanism offers a single debt contract. Our results generalize if the output distribution is “close” to multiplicatively separable. Our model suggests that offering a single contract may be optimal in environments with adverse selection and moral hazard when agents are risk neutral and have limited liability

When can lotteries improve public procurement processes?

We study the feasibility, challenges, and potential benefits of adding a lottery component to standard negotiated and rule-based procurement procedures. For negotiated procedures, we introduce a “discrete lottery” in which local bureaucrats negotiate with a small number of selected bidders and a lottery decides who is awarded the contract. We show that the discrete lottery performs better than a standard negotiated procedure when the pool of firms to choose from is large and corruption is high. For rule-based auction procedures, we introduce a “third-price lottery” in which the two highest bidders are selected with equal probability and the project is contracted at a price corresponding to the third highest bid. We show that the third-price lottery reduces the risks from limited liability and renegotiation. It performs better than a standard second-price or ascending auction when the suppliers’ pool size, the risk of cost overrun, delays and non-delivery of the project are high. The choice between a second-price auction, a third price lottery and a lottery amongst all bidders also depends on the weight placed on producer surplus, including for instance the desire to increase the participation of local SMEs in public sector services markets

BIM-based software for construction waste analytics using artificial intelligence hybrid models

The Construction industry generates about 30% of the total waste in the UK. Current high landfill cost and severe environmental impact of waste reveals the need to reduce waste generated from construction activities. Although literature reveals that the best approach to Construction Waste (CW) management is minimization at the design stage, current tools are not robust enough to support architects and design engineers. Review of extant literature reveals that the key limitations of existing CW management tools are that they are not integrated with the design process and that they lack Building Information Modelling (BIM) compliance. This is because the tools are external to design BIM tools used by architects and design engineers. This study therefore investigates BIM-based strategies for CW management and develops Artificial Intelligent (AI) hybrid models to predict CW at the design stage. The model was then integrated into Autodesk Revit as an add-in (BIMWaste) to provide CW analytics. Based on a critical realism paradigm, the study adopts exploratory sequential mixed methods, which combines both qualitative and quantitative methods into a single study. The study starts with the review of extant literature and (FGIs) with industry practitioners. The transcripts of the FGIs were subjected to thematic analysis to identify prevalent themes from the quotations. The factors from literature review and FGIs were then combined and put together in a questionnaire survey and distributed to industry practitioners. The questionnaire responses were subjected to rigorous statistical process to identify key strategies for BIM-based approach to waste efficient design coordination. Results of factor analysis revealed five groups of BIM strategies for CW management, which are: (i)improved collaboration for waste management, (ii)waste-driven design process and solutions, (iii)lifecycle waste analytics, (iv) Innovative technologies for waste intelligence and analytics, and (v)improved documentation for waste management. The results improve the understanding of BIM functionalities and how they could improve the effectiveness of existing CW management tools. Thereafter, the key strategies were developed into a holistic BIM framework for CW management. This was done to incorporate industrial and technological requirements for BIM enabled waste management into an integrated system.The framework guided the development of AI hybrid models and BIM based tool for CW management. Adaptive Neuro-Fuzzy Inference System (ANFIS) model was developed for CW prediction and mathematical models were developed for CW minimisation. Based on historical Construction Waste Record (CWR) from 117 building projects, the model development reveals that two key predictors of CW are “GFA” and “Construction Type”. The final models were then incorporated into Autodesk Revit to enable the prediction of CW from building designs. The performance of the final tool was tested using a test plan and two test cases. The results show that the tool performs well and that it predicts CW according to waste types, element types, and building levels. The study generated several implications that would be of interest to several stakeholders in the construction industry. Particularly, the study provides a clear direction on how CW management strategies could be integrated into BIM platform to streamline the CW analytics

Limited liability and mechanism design in procurement

In the presence of cost uncertainty, limited liability introduces the possibility of default in procurement with its associated bank-ruptcy costs. When financial soundness is not perfectly observable, we show that incentive compatibility implies that financially less sound contractors are selected with higher probability in any feasible mechanism. Informational rents are associated with unsound financial situations. By selecting the financially weakest contractor, stronger price competition (auctions) may not only increase the probability of default but also expected rents. Thus, weak conditions are suffcient for auctions to be suboptimal. In particular, we show that pooling firms with higher assets may reduce the cost of procurement even when default is costless for the sponsor