Affirmative Action and Dual Sourcing: Towards Supplier Diversity before the Time of Cholera

Abstract

The current COVID-19 pandemic has highlighted the need to rely on a diverse pool
of suppliers, besides achieving cost effectiveness. We propose complementing a share
auction for dual sourcing with affirmative action to create an endogenous set-aside
for a high-cost supplier. In our model more intensive affirmative action strengthens
the targeted provider. This has the potential to level the playing field, inducing more
competitive procurement overall. Our main result provides a condition under which
the endogenous set-aside not only guarantees a very substantial share for the high-cost
supplier, but also reduces the buyer's provision cost compared to a standard auction.
We also illustrate how our approach can help reducing the severity and likelihood of
health product shortages, such as those occurred during the recent COVID-19 outbreak.

Keywords: Affirmative Action, Set-Asides, Dual Sourcing, Supply Chains, Procurement

JEL Classification: D44, D47, H57, J15