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On the Benefits of Set-Asides

Author

Listed:
  • Philippe Jehiel
  • Laurent Lamy

Abstract

Set-aside programs that consist in forbidding access to specific participants are commonly used in procurement auctions. We show that when the set of potential participants is composed of an incumbent (whose entry costs are already sunk) and of entrants who show up endogenously (in such a way that their expected rents are fixed by outside options), then it is always beneficial for revenues to exclude the incumbent in the Vickrey auction. This exclusion principle is generalized to dominant-strategy auctions that favor the incumbent in the sense that the incumbent would always get the good when valuing it most. By contrast, set-asides are not desirable if the incumbent’s payoff is included in the seller’s objective in the Vickrey auction, and more generally it is detrimental to exclude a bidder that is not favored.

Suggested Citation

  • Philippe Jehiel & Laurent Lamy, 2020. "On the Benefits of Set-Asides," Journal of the European Economic Association, European Economic Association, vol. 18(4), pages 1655-1696.
    • Handle: RePEc:oup:jeurec:v:18:y:2020:i:4:p:1655-1696.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvz021
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    Cited by:

    1. José Alcalde & Matthias Dahm, 2020. "Affirmative Action Through Endogenous Set-Asides," QM&ET Working Papers 20-1, University of Alicante, D. Quantitative Methods and Economic Theory.
    2. Matilde Cappelletti & Leonardo M. Giuffrida, 2024. "Targeted Bidders in Government Tenders," CESifo Working Paper Series 11142, CESifo.
    3. Lamy, Laurent & Patnam, Manasa & Visser, Michael, 2023. "Distinguishing incentive from selection effects in auction-determined contracts," Journal of Econometrics, Elsevier, vol. 235(2), pages 1172-1202.
    4. Chen, Jiafeng & Kominers, Scott Duke, 2021. "Auctioneers sometimes prefer entry fees to extra bidders," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    5. José Alcalde & Matthias Dahm, "undated". "Supplier Diversity before the Time of Cholera," Discussion Papers in Economics 20/07, Division of Economics, School of Business, University of Leicester.
    6. Alcalde, José & Dahm, Matthias, 2024. "On the trade-off between supplier diversity and cost-effective procurement," Journal of Economic Behavior & Organization, Elsevier, vol. 217(C), pages 63-90.

    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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