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Procurement with specialized firms

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  • Jan Boone
  • Christoph Schottmüller

Abstract

This paper analyzes optimal procurement mechanisms in a setting where the procurement agency has incomplete information concerning the firms' cost functions and cares about quality as well as price. Low type firms are cheaper than high type firms in providing low quality but more expensive when providing high quality. Hence, each type is specialized in a certain quality level. We show that this specialization leads to a bunching of types on profits, i.e. a range of firms with different cost functions receives zero profits and therefore no informational rents. If first best welfare is monotone in the efficiency parameter, the optimal mechanism can be implemented by a simple auction. If first best welfare is U-shaped in type, the optimal mechanism is not efficient in the sense that types providing a lower second best welfare win against types providing a higher second best welfare.
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Suggested Citation

  • Jan Boone & Christoph Schottmüller, 2016. "Procurement with specialized firms," RAND Journal of Economics, RAND Corporation, vol. 47(3), pages 661-687, August.
  • Handle: RePEc:bla:randje:v:47:y:2016:i:3:p:661-687
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    File URL: http://hdl.handle.net/10.1111/rand.2016.47.issue-3
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    References listed on IDEAS

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    1. John Asker & Estelle Cantillon, 2008. "Properties of scoring auctions," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 69-85.
    2. Ganuza, Juan-Jose & Pechlivanos, Lambros, 2000. "Heterogeneity-promoting optimal procurement," Economics Letters, Elsevier, vol. 67(1), pages 105-112, April.
    3. Araujo, Aloisio & Moreira, Humberto, 2010. "Adverse selection problems without the Spence-Mirrlees condition," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1113-1141, May.
    4. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Auctioning Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 921-937, October.
    5. Laurie Johnson & Starla Yeh & Chris Hope, 2013. "The social cost of carbon: implications for modernizing our electricity system," Journal of Environmental Studies and Sciences, Springer;Association of Environmental Studies and Sciences, vol. 3(4), pages 369-375, December.
    6. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, May.
    7. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, May.
    8. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
    9. McAfee, R. Preston & McMillan, John, 1988. "Multidimensional incentive compatibility and mechanism design," Journal of Economic Theory, Elsevier, vol. 46(2), pages 335-354, December.
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    Cited by:

    1. Daniel Danau & Annalisa Vinella, 2017. "Contractual design in agency problems with non-monotonic cost and correlated information," SERIES 02-2017, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Mar 2017.

    More about this item

    JEL classification:

    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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