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The Costs and Benefits of Mediocrity: Endogenous Auction Design in Procurement

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Listed:
  • Frank Stähler
  • Andrea Tulli

Abstract

We study bidding in a broad class of price-based procurement mechanisms in which the lowest bid does not always win. These mechanisms are used when cost overruns and non-compliance affect contract execution. We first characterize equilibrium bidding behavior in a general setting with endogenous winning probabilities. We then analyze mixed auction formats in which bidders face uncertainty about the allocation rule, as in the Italian system where a lowest-price or average bid rule is selected based on participation. We show that increasing reliance on the latter can improve compliance but raises bids and expected payments, highlighting a trade-off between contract performance and low award prices.

Suggested Citation

  • Frank Stähler & Andrea Tulli, 2026. "The Costs and Benefits of Mediocrity: Endogenous Auction Design in Procurement," CESifo Working Paper Series 12970, CESifo.
    • Handle: RePEc:ces:ceswps:_12970
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    Keywords

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    JEL classification:

    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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