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Optimal Procurement with Quality Concerns

Author

Listed:
  • Giuseppe Lopomo
  • Nicola Persico
  • Alessandro T. Villa
Abstract
Adverse selection in procurement arises when low-cost bidders are also low-quality suppliers. We propose a mechanism called LoLA (lowball lottery auction) which, under some conditions, maximizes any combination of buyer's and social surplus, subject to incentive compatibility, in the presence of adverse selection. The LoLA features a floor price, and a reserve price. The LoLA has a dominant strategy equilibrium that, under mild conditions, is unique. In a counterfactual analysis of Italian government auctions, we compute the gain that the government could have made, had it used the optimal procurement mechanism (a LoLA), relative to a first-price auction (the adopted format).

Suggested Citation

  • Giuseppe Lopomo & Nicola Persico & Alessandro T. Villa, 2023. "Optimal Procurement with Quality Concerns," American Economic Review, American Economic Association, vol. 113(6), pages 1505-1529, June.
    • Handle: RePEc:aea:aecrev:v:113:y:2023:i:6:p:1505-29
    DOI: 10.1257/aer.20211437
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    Citations

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    Cited by:

    1. Antonio Estache & Renaud Foucart & Konstantinos Georgalos, 2024. "Preference for Control vs. Random Dictatorship," Working Papers 413554011, Lancaster University Management School, Economics Department.
    2. Antonio Estache & Renaud Foucart & Tomas Serebrisky, 2024. "Can Lotteries help fix Procurement Failures? A Review of Theory and Evidence," Working Papers ECARES 2024-18, ULB -- Universite Libre de Bruxelles.

    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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