Auction design and favoritism

Jean Jacques Laffont*, Jean Tirole

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    75 Scopus citations

    Abstract

    The theory of auctions has ignored the fact that often auction designers, not the principal, design auctions. In a multi attribute auction, the auction designer may bias his subjective evaluation of quality or distort the relative weights of the various attributes to favor a specific bidder, an ancient concern in the procurement of weapons, in the auctioning of government contracts and in the purchase of electricity by regulated power companies. The paper analyzes the steps to be taken to reduce the possibility of favoritism. It is first shown that in the absence of favoritism, quality differentials among firms are more likely to be ignored, if the auction designer has imperfect information about the firm's costs. Second, if the auction designer may collude with only one bidder, the other bidders should be chosen if they are at least as efficient as the former bidder, and no hard information about quality differentials is released by the auction designer that would justify fair discrimination in favor of the former bidder. Last, if the auction designer can collude with any bidder, the optimal auction tends to a symmetric auction in which quality differentials are ignored. The possibility of favoritism reduces the auction designer's discretion and makes the selection process focus on non-manipulable (monetary) dimensions of bids.

    Original languageEnglish (US)
    Pages (from-to)9-42
    Number of pages34
    JournalInternational Journal of Industrial Organization
    Volume9
    Issue number1
    DOIs
    StatePublished - Mar 1991

    ASJC Scopus subject areas

    • Industrial relations
    • Aerospace Engineering
    • Economics and Econometrics
    • Economics, Econometrics and Finance (miscellaneous)
    • Strategy and Management
    • Industrial and Manufacturing Engineering

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