Cost-Reducing Investment, Optimal Procurement and Implementation by Auctions

Michele Piccione and Guofu Tan

International Economic Review, 1996, vol. 37, issue 3, 663-85

Abstract: The authors analyze a model in which potential suppliers invest in research and development (R&D) and then compete for a procurement contract from a buyer. If the buyer is able to commit to a procurement mechanism before the investment stage, the full-information solution can be uniquely implemented by first-price and second-price sealed-bid auction mechanisms when the R&D technology exhibits decreasing returns to scale. If the procurement mechanisms and the levels of investment are chosen simultaneously, the full-information solution cannot be implemented. The authors discuss how the second-best equilibrium contract varies with the number of suppliers. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1996
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