Split-Award Contracts with Investment
27 Pages Posted: 19 Feb 2011
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
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