Procurement with specialized firms

Jan Boone, C. Schottmuller

Research output: Contribution to journalArticleScientificpeer-review

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Abstract

We analyze optimal procurement mechanisms when firms are specialized. The procurement agency has incomplete information concerning the firms' cost functions and values high quality as well as low price. Lower type firms are cheaper (more expensive) than higher type firms when providing low (high) quality. With specialized firms, distortion is limited and a mass of types earns zero profits. The optimal mechanism can be inefficient: types providing lower second-best welfare win against types providing higher second-best welfare. As standard scoring rule auctions cannot always implement the optimal mechanism, we introduce a new auction format implementing the optimal mechanism.
Original languageEnglish
Pages (from-to)661–687
JournalRAND Journal of Economics
Volume47
Issue number3
DOIs
Publication statusPublished - Oct 2016

Keywords

  • procurement
  • specialized firms
  • deregulation
  • countervailing incentives

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