Procurement with Unforeseen Contingencies

Fabian Herweg and Klaus M. Schmidt

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: A buyer who wants to procure a complex good is often aware that there may be flaws in her initial design, but she does not know what they look like. Potential sellers who discover flaws have no incentive to reveal them early if the buyer uses a price-only auction. We derive an efficient mechanism that induces all sellers to report flaws early and that allocates the project to the seller with the lowest cost. We show that this can be implemented with a simple two-stage auction that does not require any prior knowledge of the set of possible flaws.

Date: 2020
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Citations: View citations in EconPapers (5)

Published in Management Science 5 66(2020): pp. 2194-2212

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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenar:84781

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