Procurement with Unforeseen Contingencies

Herweg, Fabian und Schmidt, Klaus M. (2020): Procurement with Unforeseen Contingencies. In: Management Science, Vol. 66, No. 5: pp. 2194-2212

Abstract

A buyer who wants to procure a complex good is often aware that there may be flaws in her initial design, but she does not know what they look like. Potential sellers who discover flaws have no incentive to reveal them early if the buyer uses a price-only auction. We derive an efficient mechanism that induces all sellers to report flaws early and that allocates the project to the seller with the lowest cost. We show that this can be implemented with a simple two-stage auction that does not require any prior knowledge of the set of possible flaws.

• Item Type: Journal article
• Faculties: Economics
• Subjects: 300 Social sciences > 330 Economics
• ISSN: 0025-1909
• Language: English