Split-Award Contracts with Investment

27 Pages Posted: 19 Feb 2011

See all articles by Jiong Gong

Jiong Gong

University of International Business and Economics (UIBE)

Li Jianpei

University of International Business and Economics (UIBE)

R. Preston McAfee

California Institute of Technology - Division of the Humanities and Social Sciences; Yahoo! - Yahoo! Research Labs

Date Written: February 14, 2011

Abstract

This paper studies procurement contracts where a buyer can either divide full production among multiple suppliers or award the entire production to a single supplier. We examine the effect of using multiple suppliers on investment incentives. In a framework of generalized second-price auctions with pre-auction investment, we show that the optimality of split-award depends on the socially efficient number of firms at the investment stage. When that number is greater than one, sole sourcing is buyer-optimal. When that number is one, split-award lowers the buyer procurement cost.

Keywords: split-award, generalized second-price auctions, investment

JEL Classification: C72, D44, L14

Suggested Citation

Gong, Jiong and Jianpei, Li and McAfee, Randolph Preston and McAfee, Randolph Preston, Split-Award Contracts with Investment (February 14, 2011). Available at SSRN: https://ssrn.com/abstract=1762696 or http://dx.doi.org/10.2139/ssrn.1762696

Jiong Gong (Contact Author)

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

Li Jianpei

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

Randolph Preston McAfee

Yahoo! - Yahoo! Research Labs ( email )

Sunnyvale, CA 94089
United States

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States

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