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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.

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Authors and Affiliations

  1. Department of Economics, University of Birmingham, Birmingham, B15 2TT, UK

    Peter Postl

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  1. Peter Postl
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Correspondence to Peter Postl.

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I am indebted to Siddhartha Bandyopadhyay, Tilman Börgers, Mridu Prabal Goswami, Esther Hauk, Philipe Jehiel, Ian Jewitt, Thomas Kittsteiner, Andrea Prat, Colin Rowat, Rajiv Sarin and Gábor Virág. I would also like to thank an anonymous referee for many valuable suggestions. Finally, I am grateful for the hospitality of the Planning Unit at the Indian Statistical Institute (Delhi), and the Institute of Economic Theory and Statistics at Karlsruhe Institute of Technology, where much of this research was conducted.

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Postl, P. Efficiency versus optimality in procurement. Econ Theory 53, 425–472 (2013). https://doi.org/10.1007/s00199-012-0699-x

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