Optimal Procurement with Quality Concerns

Giuseppe Lopomo, Nicola Persico, Alessandro T. Villa*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

Adverse selection in procurement arises when low-cost bidders are also low-quality suppliers. We propose a mechanism called LoLA (lowball lottery auction) which, under some conditions, maximizes any combination of buyer’s and social surplus, subject to incentive compatibility, in the presence of adverse selection. The LoLA features a floor price, and a reserve price. The LoLA has a dominant strategy equilibrium that, under mild conditions, is unique. In a counterfactual analysis of Italian government auctions, we compute the gain that the government could have made, had it used the optimal procurement mechanism (a LoLA), relative to a first-price auction (the adopted format).

Original languageEnglish (US)
Pages (from-to)1505-1529
Number of pages25
JournalAmerican Economic Review
Volume113
Issue number6
DOIs
StatePublished - Jun 2023

ASJC Scopus subject areas

  • Economics and Econometrics

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