Efficiency versus Optimality in Procurement

Peter Postl

Discussion Papers from Department of Economics, University of Birmingham

Abstract: We study procurement procedures that simultaneously determine specification and price of a good. Suppliers can offer and produce the good in either of two possible specifications, both of which are equally good for the buyer. Production costs are interdependent and unknown at the time of bidding. Each supplier receives two signals about production cost, one per specification. Our model is a special case of the interdependent-value settings with multi-dimensional types in Jehiel and Moldovanu (2001) where an efficient and incentive compatible mechanism exists. We characterize equilibrium bidding behavior if the winning supplier is selected purely on the basis of price, regardless of the specification offered. While there is a positive chance of obtaining an inefficient specification, this procurement mechanism involves lower information rents than efficient mechanisms, suggesting that there is a trade-off between minimizing expected expenditure for the good, and ensuring that the efficient specification is chosen.

Keywords: Procurement; interdependent valuations; multi-dimensional information; efficient mechanisms; optimal mechanisms (search for similar items in EconPapers)
JEL-codes: C72 D44 D82 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2011-12
New Economics Papers: this item is included in nep-cta
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https://repec.cal.bham.ac.uk/pdf/11-03.pdf

Related works:
Journal Article: Efficiency versus optimality in procurement (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bir:birmec:11-03

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