Procurement with Specialized Firms

Jan Boone and C. Schottmuller
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C. Schottmuller: Tilburg University, Center for Economic Research

No 2011-131, Discussion Paper from Tilburg University, Center for Economic Research

Abstract: This paper analyzes optimal procurement mechanisms in a setting where the procurement agency has incomplete information concerning the firms’ cost functions and cares about quality as well as price. Low type firms are cheaper than high type firms in providing low quality but more expensive when providing high quality. Hence, each type is specialized in a certain quality level. We show that this specialization leads to a bunching of types on profits, i.e. a range of firms with different cost functions receives zero profits and therefore no informational rents. If first best welfare is monotone in the efficiency parameter, the optimal mechanism can be implemented by a simple auction. If first best welfare is U-shaped in type, the optimal mechanism is not efficient in the sense that types providing a lower second best welfare win against types providing a higher second best welfare.

JEL-codes: H75 L51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta and nep-mic
Date: 2011
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Related works:
Working Paper: Procurement with specialized firms (2011)
Working Paper: Procurement with Specialized Firms (2011)
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Persistent link: http://EconPapers.repec.org/RePEc:dgr:kubcen:2011131

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