DP11564 On the benefits of set-asides

Author(s): Philippe Jehiel, Laurent Lamy
Publication Date: October 2016
Keyword(s): asymmetric buyers, auctions with endogenous entry, entry deterrence, government procurement, incumbents, set-asides
JEL(s): D44, H57, L10
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11564

Set-asides programs which consist in forbidding access to specific participants are commonly used in procurement auctions. We show that when the set of potential participants is composed of an incumbent (who bids for sure if allowed to) and of entrants who show up endogenously (in such a way that their expected rents are fixed by outside options), then it is always beneficial to exclude the incumbent in the second-price auction. This exclusion principle carries over to other auction formats that favor the incumbent and also to some environments with multiple incumbents. Whether it could be beneficial to exclude some kinds of entrants is also addressed. Various applications are discussed.