Procurement Auctions (with Fahad Khalil and Jacques Lawarree)

Indranil Chakraborty | NUS

Making sure that the selected bidder delivers quality after winning the auction is a distinct feature of procurement auctions.  When quality is not directly observable, it necessitates combining an incentive scheme with the optimal auction mechanism to ensure that the winning bidder provides a quality product.  In a procurement auction with moral hazard, we find a new effect: a high-cost bidder may earn rent by exerting low effort when pretending to have a low cost.  We show that an increase in the number of bidders exacerbates this problem.  Indeed, this new effect may overwhelm the standard rent extraction effect of increased competition, which could limit the optimal number of bidders.