Optimal procurement auctions with audit
It is well known that one possible solution to limit the contractor's default risk in first-price procurement auctions is to audit the winning firm in order to assess the reliability of its bid, and, in case of an unsatisfactory response, move to the firm that ranked second, and so on. In this article, focusing on a situation in which firms with cheaper technologies have a higher risk of default ex-post, the authors provide conditions that ensure that a first-price auction with audit is indeed optimal. What's more, it is shown that these conditions are likely to be satisfied when the relation between firms' cost and default risk is not too steep and when the cost of performing the audit is not too large. The authors also characterize the optimal threshold that determines which firms are to be audited and which are not. The article discusses cases in which, instead, a first-price auction with audit is dominated by a mechanism in which the allocation (and the audit) is done randomly, at least at some point of the awarding process. The reader can find detailed proofs of all claims in the Appendix.
- A model of auction contracts with liquidated damages
- Bidding up, buying out and cooling-off: An examination of auctions with withdrawal rights
- COMPARING PUBLIC PROCUREMENT AUCTIONS
- High bids and broke winners
- Limited liability and mechanism design in procurement
- Optimal Auction Design
- Optimal Procurement Mechanisms
- Optimal procurement mechanisms: bidding on price and damages for breach
- RFQ auctions with supplier qualification screening
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