Scoring and Favoritism in Optimal Procurement Design

TL;DR

This paper analyzes optimal procurement mechanisms considering costs borne by all participants, revealing new auction formats like score floor and ceiling auctions that incorporate side payments and favoritism.

Contribution

It introduces novel procurement mechanisms accounting for all-pay costs, showing how favoritism and asymmetry can be optimal under certain cost structures.

Findings

Optimal symmetric mechanism is a scoring auction with variable steepness.

Favoritism becomes optimal when ex-post efficiency is less critical.

New auction formats include score floor and score ceiling with side payments.

Abstract

We study buyer-optimal procurement mechanisms when quality is contractible. When some costs are borne by every participant of a procurement auction regardless of winning, the classic analysis should be amended. We show that an optimal symmetric mechanism is a scoring auction with a score function that may be either flatter or steeper than classically. This depends on the relative degrees of information asymmetry over the all-pay and winner-pay costs. However, the symmetry of the optimal mechanism is not granted due to the presence of all-pay costs. When ex-post efficiency is less important than the duplication of costs, favoritism becomes optimal. We show that, depending on the degree of convexity of costs, the solution takes one of two novel formats with a partially asymmetric treatment of firms, which we call a score floor and a score ceiling auction. Interestingly, these auctions feature side payments from or to the buyer, which has nothing to do with corruption.