Optimal Procurement Mechanisms

Abstract

We analyze optimal mechanisms in environments where sellers are privately informed about quality. A methodology is provided for deriving conditions that are necessary and sufficient to determine when two simple trading environments maximize either social or private surplus. The commonly used auction mechanism is frequently inefficient in procurement environments. Often, the optimal mechanism is simply to order potential suppliers and to tender take-it-or-leave-it offers to each sequentially. We completely characterize the environments in which either mechanism is optimal. In doing so, we develop a general methodology that determines when and if a given trading institution is optimal.

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