TY - JOUR
T1 - Optimal Procurement with Quality Concerns
AU - Lopomo, Giuseppe
AU - Persico, Nicola
AU - Villa, Alessandro T.
N1 - Publisher Copyright:
© 2023 American Economic Association. All rights reserved.
PY - 2023/6
Y1 - 2023/6
N2 - 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).
AB - 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).
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U2 - 10.1257/aer.20211437
DO - 10.1257/aer.20211437
M3 - Article
AN - SCOPUS:85164355373
SN - 0002-8282
VL - 113
SP - 1505
EP - 1529
JO - American Economic Review
JF - American Economic Review
IS - 6
ER -