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Optimal Procurement with Quality Concerns

Resource type
Authors/contributors
Title
Optimal Procurement with Quality Concerns
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).
Publication
American Economic Review
Volume
113
Issue
6
Pages
1505-29
Date
2023-06
Citation
Lopomo, G., Persico, N., & Villa, A. T. (2023). Optimal Procurement with Quality Concerns. American Economic Review, 113, 1505–1529.
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