Procurement with Specialized Firms

TILEC Discussion Paper No. 2011-054

CentER Discussion Paper No. 2011-131

37 Pages Posted: 1 Dec 2011

See all articles by Jan Boone

Jan Boone

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); TILEC

Christoph Schottmüller

University of Cologne; Tilburg Law and Economics Center (TILEC)

Multiple version iconThere are 2 versions of this paper

Date Written: November 30, 2011

Abstract

This paper analyzes optimal procurement mechanisms in a setting where the procurement agency has incomplete information concerning the firms’ cost functions and cares about quality as well as price. Low type firms are cheaper than high type firms in providing low quality but more expensive when providing high quality. Hence, each type is specialized in a certain quality level. We show that this specialization leads to a bunching of types on profits, i.e. a range of firms with different cost functions receives zero profits and therefore no informational rents. If first best welfare is monotone in the efficiency parameter, the optimal mechanism can be implemented by a simple auction. If first best welfare is U-shaped in type, the optimal mechanism is not efficient in the sense that types providing a lower second best welfare win against types providing a higher second best welfare.

Keywords: procurement, specialization, deregulation

JEL Classification: H75, L51

Suggested Citation

Boone, Jan and Schottmüller, Christoph, Procurement with Specialized Firms (November 30, 2011). TILEC Discussion Paper No. 2011-054, CentER Discussion Paper No. 2011-131, Available at SSRN: https://ssrn.com/abstract=1966928 or http://dx.doi.org/10.2139/ssrn.1966928

Jan Boone (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2399 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

TILEC ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Christoph Schottmüller

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
38
Abstract Views
618
PlumX Metrics