DP2270 Procurement Favouritism and Technology Adoption

• Fernando Branco
29 Oct 1999

The design of cost minimizing procurement rules for the selection of contractors among distinct technological groups requires the favouritism of inefficient firms. It is unclear whether these policies provide incentives for inefficient firms to adopt more efficient technologies. In this paper the inefficient firm may adopt the efficient technology at some cost. Government policy can be effective for an intermediate range of adoption costs. To induce adoption, the government should commit to favour the (initially) inefficient firm, despite both firms eventually having the same technology. Even with limited government commitment, optimal favouritism provides more incentives for technology adoption than a symmetric mechanism.