What Allotment and Subcontracting in Procurement Bidding

François Maréchal and Morand, Pierre-Henri

Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) from Université de Lausanne, Faculté des HEC, DEEP

Abstract: Allotment and subcontracting are the two alternative mechanisms enabling the participation of SMEs in procurement. We compare these two alternatives in the context of a procurement contract awarded by a first-price sealed-bid auction. When the winning large firm is constrained with respect to the degree of subcontracting, we show that only a reduction of the chosen SME's profit can reduce the expected cost of the contract. However, when the large firm is allowed to choose the subcontracting level, subcontracting can be a Pareto dominating mechanism, i.e. simultaneously increasing both firms' profits and reducing the expected total cost of the contract.

Keywords: allotment; subcontracting; procurement; bidding (search for similar items in EconPapers)
JEL-codes: D44 L51 (search for similar items in EconPapers)
Date: 2004-05
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