In a competitive procurement, a buyer seeks to institute a bidding and contracting procedure which selects the most efficient firm to undertake the contract while offering terms that promote risk sharing between buyer and contractor. This paper develops a model to analyze formally the trade-off between the objectives of risk sharing and efficient contractor selection.

In the well-known model of bilateral monopoly a single seller of a good faces a single potential buyer. Frequently, each party will be uncertain about the other's reservation price. Thus, in making a price offer each faces a trade-off between his individual gains (if a bargain is successful) and the probability that a mutually acceptable bargain is concluded. This paper focuses on the implications of a bargaining rule that calls for one party to make the first and final offer, the other to accept or reject it. As one would expect, the buyer offer strategy involves “shading”. (quoting of an offer below his true reservation price for the good) while the seller employs a “markup” offer strategy. The offer strategy of each party is nondecreasing in the individual's reservation price. Furthermore, a uniformly more optimistic assessment of the opponent's reservation price (in the special sense of stochastic dominance) induces a less truthful offer from the individual. While the relative efficiency of the buyer and seller first-offer procedures must be examined on a case-by-case basis, it can be shown that the opportunity to make the first and final offer always confers a distinct bargaining advantage.

In recent years, final-offer arbitration (FOA) has become an increasingly frequent means of resolving labor disputes in the private and public sectors. The present paper models FOA when each disputant has private information bearing on the true value of the case. The model characterizes the disputants' equilibrium offer behavior and examines arbitration performance. The main conclusion is that FOA outcomes are crudely responsive to the underlying merits of the case. In its favor, FOA can be expected to be less costly to administer than arbitration procedures that attempt to extract perfect information.

The seller posted-price procedure is probably the most common method for making transactions in modern economies. We analyze the performance of posted pricing for transactions having significant common-value elements. In a model of two-sided private information, we characterize the fully revealing, perfect equilibrium offer strategy of the seller. We also characterize equilibrium behavior under two other pricing procedures—a sealed-bid procedure and a direct revelation mechanism. Finally, we examine the efficiency of these procedures and show that as the degree of common values increases, fewer mutually beneficial agreements are attained.