Procurement Auctions with Advised Bidders

Abstract

In procurement auctions, suppliers' senior managers in charge of bidding often rely on advisors, such as project managers and technical specialists, to evaluate project costs. These advisors may be biased for inflating the costs due to agency or career concerns. We study the procurement agency's choice between sealed-bid static auctions and a dynamic Dutch auction in this setting. If the number of competing suppliers is small, static auctions result in lower expected costs than the Dutch auction. This ranking is reversed if procurement is sufficiently competitive. The Dutch auction is always more efficient regardless of the number of suppliers.

Keywords: procurement, advised bidders, cheap talk, agency problems

JEL Classification: D44, D47, D82