The Costs and Benefits of Mediocrity: Endogenous Auction Design in Procurement

Frank Stähler and Andrea Tulli

No 12970, CESifo Working Paper Series from CESifo

Abstract: We study bidding in a broad class of price-based procurement mechanisms in which the lowest bid does not always win. These mechanisms are used when cost overruns and non-compliance affect contract execution. We first characterize equilibrium bidding behavior in a general setting with endogenous winning probabilities. We then analyze mixed auction formats in which bidders face uncertainty about the allocation rule, as in the Italian system where a lowest-price or average bid rule is selected based on participation. We show that increasing reliance on the latter can improve compliance but raises bids and expected payments, highlighting a trade-off between contract performance and low award prices.

Keywords: procurement; average bid auction; cost overrun (search for similar items in EconPapers)
JEL-codes: D44 H57 (search for similar items in EconPapers)
Date: 2026
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