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Incentive and sampling effects in procurement auctions with endogenous number of bidders

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  • Koh, Youngwoo

Abstract

We study an auction contest for a procurement of innovation. Firms exert effort and the resulting quality of innovation is ex ante uncertain. Given this uncertainty, there is a trade-off regarding the number of participating firms in the contest: increasing the number of firms reduces each firm’s chance of winning the auction, leading the firms to reduce effort level; meanwhile, the chance of obtaining a high quality of innovation increases with the number of firms due to the randomness of the quality. Thus, the procurer faces a nontrivial problem of how many firms to invite. We show that in the high level of randomness, it is optimal for the procurer to invite many firms. As the randomness vanishes, however, inviting only two firms is optimal. We also show that a fixed-prize tournament may outperform the auction when the randomness is large.

Suggested Citation

  • Koh, Youngwoo, 2017. "Incentive and sampling effects in procurement auctions with endogenous number of bidders," International Journal of Industrial Organization, Elsevier, vol. 52(C), pages 393-426.
    • Handle: RePEc:eee:indorg:v:52:y:2017:i:c:p:393-426
    DOI: 10.1016/j.ijindorg.2017.02.006
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    Cited by:

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    3. Vivek Bhattacharya, 2021. "An Empirical Model of R&D Procurement Contests: An Analysis of the DOD SBIR Program," Econometrica, Econometric Society, vol. 89(5), pages 2189-2224, September.

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    More about this item

    Keywords

    Procurement; Contest; Auction; Innovation; Quality;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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