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What Allotment and Subcontracting in Procurement Bidding

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  • François MARÉCHAL
  • Pierre-Henri MORAND

Abstract

Allotment and subcontracting are the two alternative mechanisms enabling the participation of SMEs in procurement. We compare these two alternatives in the context of a procurement contract awarded by a first-price sealed-bid auction. When the winning large firm is constrained with respect to the degree of subcontracting, we show that only a reduction of the chosen SME's profit can reduce the expected cost of the contract. However, when the large firm is allowed to choose the subcontracting level, subcontracting can be a Pareto dominating mechanism, i.e. simultaneously increasing both firms' profits and reducing the expected total cost of the contract.

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Bibliographic Info

Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 04.06.

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Length: 24 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:lau:crdeep:04.06

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
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Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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Keywords: allotment; subcontracting; procurement; bidding;

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References

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  1. Klemperer, Paul, 1999. " Auction Theory: A Guide to the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 13(3), pages 227-86, July.
  2. Pierre-Henri Morand, 2003. "SMEs and public procurement policy," Review of Economic Design, Springer, vol. 8(3), pages 301-318, October.
  3. Kawasaki, Seiichi & McMillan, John, 1987. "The design of contracts: Evidence from Japanese subcontracting," Journal of the Japanese and International Economies, Elsevier, vol. 1(3), pages 327-349, September.
  4. Marechal, Francois & Morand, Pierre-Henri, 2003. "Pre vs. post-award subcontracting plans in procurement bidding," Economics Letters, Elsevier, vol. 81(1), pages 23-30, October.
  5. Yun, Mikyung, 1999. "Subcontracting relations in the Korean automotive industry: risk sharing and technological capability," International Journal of Industrial Organization, Elsevier, vol. 17(1), pages 81-108, January.
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