Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/264335 
Year of Publication: 
2022
Series/Report no.: 
Working Paper No. WP 2022-21
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
Abstract: 
Adverse selection in procurement arises when low-cost bidders are also lowquality suppliers. We propose a mechanism called LoLA which, under some conditions, is the best incentive-compatible mechanism for maximizing either the seller's or the social surplus in the presence of adverse selection. The LoLA features a floor (or minimum) price, and a reserve (or maximum) price. Conveniently, the LoLA has a dominant strategy equilibrium that, under mild regularity conditions, is unique. We perform a counterfactual experiment on Italian government procurement auctions: we compute the gain that the government could have made, had it used the optimal mechanism (which happens to be a LoLA), relative to a first-price auction, which is the format the government actually used. Finally, we provide software applications for computing the optimal procurement mechanism.
Subjects: 
Procurement Auctions
Mechanism Design
Auctions
Asymmetric and Private Information
Mechanism Design
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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