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Procurement with specialized firms

Boone,Jan
; 
Schottmuller,C.
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.
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2016-10
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Tilburg University Research Output Collection
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Rand_Round_3.pdf
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Keywords
procurement, specialized firms, deregulation, countervailing incentives, D82 - Asymmetric and Private Information ; Mechanism Design, H75 - State and Local Government: Health ; Education ; Welfare ; Public Pensions, L51 - Economics of Regulation
Citation
Boone, J & Schottmuller, C 2016, 'Procurement with specialized firms', RAND Journal of Economics, vol. 47, no. 3, pp. 661–687. https://doi.org/10.1111/1756-2171.12143
URI
https://hdl.handle.net/20.500.14602/65425
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