Optimal Procurement Design: A Reduced Form Approach

Abstract: Standard procurement models assume that the buyer knows the quality of the good at the time of procurement; however, in many settings, the quality is learned only long after the transaction. We study procurement problems in which the buyer's valuation of the supplied good depends directly on its quality, which is unverifiable and unobservable to the buyer. For a broad class of procurement problems, we identify procurement mechanisms maximizing any weighted average of the buyer's expected payoff and social surplus. The optimal mechanism can be implemented by an auction that restricts sellers to submit bids within specific intervals.