Data and Code for: Optimal Procurement With Quality Concerns

Dataset

Description

Adverse selection in procurement arises when low-cost bidders are also lowquality suppliers. We propose a mechanism called LoLA which, under some conditions, is the best incentive-compatible mechanism for maximizing any combination of buyer’s and social surplus in the presence of adverse selection. The LoLA features a floor (or minimum) price, and a reserve (or maximum) price. Conveniently, the LoLA has a dominant strategy equilibrium that, under mild regularity conditions, is unique. We perform a counterfactual experiment on Italian government procurement auctions: we compute the gain that the government could have made, had it used the optimal mechanism (which happens to be a LoLA), relative to a first-price auction, which is the format the government actually used.

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