Efficiency versus optimality in procurement

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Abstract

We study procurement procedures that simultaneously determine the specification and price of a good. Suppliers can offer and produce the good in either of two possible specifications, both of which are equally good for the buyer. Production costs are interdependent and unknown at the time of bidding. Each supplier receives two signals about production cost, one per specification. Our model is a special case of the interdependent value settings with multidimensional types in Jehiel and Moldovanu (Econometrica 69:1237–1259, 2001) where an efficient and incentive compatible mechanism exists. We characterize equilibrium bidding behavior if the winning supplier is selected purely on the basis of price, regardless of the specification offered. While there is a positive chance of obtaining an inefficient specification, this procurement
mechanism involves lower information rents than efficient mechanisms, suggesting that there is a trade-off between minimizing expected expenditure for the good, and ensuring that the efficient specification is chosen.
Original languageEnglish
Pages (from-to)425-472
Number of pages47
JournalEconomic Theory
Volume53
Issue number2
Early online date20 Mar 2012
DOIs
Publication statusPublished - Jun 2013

Keywords

  • Procurement
  • Interdependent valuations
  • Multidimensional information
  • Efficient mechanisms
  • Optimal mechanisms

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