Bayesian implementation and rent extraction in a multi-dimensional procurement problem

• Published in: International journal of industrial organization Vol. 70; p. 102521
• Main Authors: Herweg, Fabian, Schmidt, Klaus M.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.05.2020
• Subjects: Auction; Correlated types; Inefficient renegotiation; Multidimensional screening; Procurement; Procurement; Multidimensional screening; D44; Auction; D47; H57; Correlated types; Inefficient renegotiation; D82
• ISSN: 0167-7187
• DOI: 10.1016/j.ijindorg.2019.06.003

•We consider a multi-dimensional procurement problem.•Sellers have private information about their costs and about a possible design flaw.•We compare the efficient Bayesian to the ex post incentive compatible mechanism. We consider a multi-dimensional procurement problem in which sellers have private information about their costs and about a possible design flaw. The information about the design flaw is necessarily correlated. We solve for the Bayesian procurement mechanism that implements the efficient allocation at the lowest cost under the constraint that sellers are protected by limited liability. We show that the rents obtained from reporting costs truthfully can be used to reduce the rents sellers must get for reporting the flaw. We compare the efficient Bayesian mechanism to the efficient ex post incentive compatible mechanism studied by Herweg and Schmidt (2019) that is informationally less demanding.