DP11564 On the benefits of set-asides
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.