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Competition for procurement contracts and underinvestment

Research output: Contribution to Journal/MagazineJournal articlepeer-review

<mark>Journal publication date</mark>11/1990
<mark>Journal</mark>International Economic Review
Issue number4
Number of pages25
Pages (from-to)841-865
Publication StatusPublished
<mark>Original language</mark>English


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.