Optimality of simple procurement auctions

摘要

We consider procurement auctions for the projects where the cost of production is subject to ex-post shocks-cost overruns. The contractor may default due to these overruns, which affects the buyer's expected cost. Here the lowest-bid auction emerges as the procurement mechanism that: (i) minimizes the expected transfers to the contractors, and (ii) requires the lowest surety bond to achieve a given probability of default. Since surety bonds are costly to post, the above makes a combination of the lowest-bid auction with the surety bond the optimal, i.e., the expected cost minimizing procurement mechanism in a wide range of parameters. (C) 2020 Elsevier B.V. All rights reserved.