Bidding and renegotiation in procurement auctions

In this paper, we study renegotiation ill procurement auctions. A procurer with private valuation announces a project which can be completed by many firms. These firms submit bids which may be renegotiated upon later. In the equilibrium we characterize, the probability of renegotiation is decreasing in both the cost of renegotiation and the number of firms. We conclude that the initial bids are more than 'cheap talk'; these prices serve simultaneously as bids to win the contract, and signals of the firms' costs. Finally, we compare our model to other renegotiation models in the literature. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: C72; C78; D82.