Cost-Reducing Investment, Optimal Procurement and Implementation by Auctions.

The authors analyze a model in which potential suppliers invest in research and development (R&D) and then compete for a procurement contract from a buyer. If the buyer is able to commit to a procurement mechanism before the investment stage, the full-information solution can be uniquely implemented by first-price and second-price sealed-bid auction mechanisms when the R&D technology exhibits decreasing returns to scale. If the procurement mechanisms and the levels of investment are chosen simultaneously, the full-information solution cannot be implemented. The authors discuss how the second-best equilibrium contract varies with the number of suppliers. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.