Strategic Delegation in Procurement

Eduard Alonso-Pauli (Universitat de les Illes Balears)
Lluis Bru (Universitat de les Illes Balears)

Abstract : In a firm organized into business units, we show that profitability increases if procurement is delegated to the division in charge of production. We emphasize that our results are driven by the business unit having a different objective function than the headquarters (HQ). The profitability of procurement delegation is affected by how essential the production facilities are to the activities of the firm, and by strategic distortions in both transfer and input prices. We also examine the vertical separation of activities as an alternative to procurement delegation.

Secret Reserve Prices by Uninformed Sellers

Pavel Andreyanov (National Research University, HSE, Moscow)
El Hadi Caoui (University of Toronto)

Abstract : This paper investigates a rationale for the use of secret reserve prices in auctions. If bidders are better informed than the seller about a common component of auction heterogeneity, the seller can allocate more efficiently by keeping her reserve price secret and revising it after bids are submitted. We build a model of a first-price auction under unobserved auction heterogeneity (imperfectly observed by the seller) that captures this rationale and derive conditions for identification. The model is estimated using data on French timber auctions, where the government uses an ex-ante secret reserve price (which can be revised down if no bid is above it). Counterfactual analysis shows that acquiring perfect signals about unobserved auction heterogeneity would allow the seller to increase revenue by 8.41% and surplus by 6.73%. Learning from submitted bids improves allocative efficiency albeit with some revenue loss.

Competition and Contract Performance: Evidence from Us Defense Procurement

Andres Gonzalez-Lira (UC Berkeley)
Rodrigo Carril (Stanford)
Michael S. Walker (Dept. of Defense)

Abstract : We study the effects of intensifying competition for contracts through advertising. Publicizing contract opportunities promotes bidder participation, potentially leading to cost efficiency gains. Yet extensive advertising could exacerbate adverse selection of bidders on non-contractible quality dimensions. We study this trade-off in the context of procurement contracts for the U.S. Department of Defense. Our empirical strategy leverages a regulation that mandates agencies to publicize contract opportunities that exceed a certain threshold. We find that advertised contracts increase competition and reduce prices. However, we find that the post-award performance of publicized contracts worsens, resulting in more cost overruns and delays. The latter effect is driven by goods and services that are relatively more complex, highlighting the role of contract incompleteness. We complement our results with a model in which the buyer endogenously decides the extent of competition. This model allows us to recover public buyers' preference parameters over price, quality, and idiosyncratic favoritism, and further study the extent to which the trade-off between competition and adverse selection can be delegated to the agent.