Specification and negotiation in incomplete contracts

We investigate contractors' bargaining power and holdup on buyers in procurement auctions of incomplete contracts held by California Department of Transportation. Using a model where contractors bid competitively in response to a buyer's choice of initial contract design, we infer the contractors' costs and bargaining power from the bids and transfers negotiated after the auction. We find that the contract winners have substantial bargaining power in post-auction negotiation. The average holdup on the buyer is about 20% of project costs. Counterfactual cost-plus contracts would reduce the buyer's surplus in 72% of the projects, with an average reduction over $382,000.