The ambiguity dilemma in procurement projects

The purpose of this paper is to use game theory and ambiguity theory to show how “economically rational” vendors will behave in a procurement process that runs over more than one period. In light of that behavior, we have proposed “economically rational” counter-strategies on the part of purchasers.

Based on a perception–expectation framework, a unique game-based approach is designed. The authors have proposed “economically rational” counter-strategies on the part of purchasers, which are premised on the theory of rational agency.

Ambiguity in the procurement process is a bane for procuring principals and a boon for suppliers – for the former, it is an issue to be managed, and for the latter it provides an opportunity to extract “insurance rents” from the principals. The authors show that, under certain conditions, the contracting principal can be exploited by a rational, rent-extracting vendor. In particular, they show that there is an incentive for a vendor to delay the resolution of ambiguities in the contract until late in the procurement process, when the insurance rents are at a maximum.

This study contributes to the current literature by highlighting an existing problem in the procurement process and describing it using decision theory under ambiguity in a game-like setting. Specifically, the authors use game theory in a unique way to deal with imperfect information coupled with ambiguity.