The Costs and Benefits of Mediocrity: Endogenous Auction Design in Procurement

Abstract

We study bidding in a broad class of price-based procurement mechanisms in which the lowest bid does not always win. These mechanisms are used when cost overruns and non-compliance affect contract execution. We first characterize equilibrium bidding behavior in a general setting with endogenous winning probabilities. We then analyze mixed auction formats in which bidders face uncertainty about the allocation rule, as in the Italian system where a lowest-price or average bid rule is selected based on participation. We show that increasing reliance on the latter can improve compliance but raises bids and expected payments, highlighting a trade-off between contract performance and low award prices.