The Impact of Reserve Prices on the Technology of Procured Items

Authors: 
Robert C. Marshall, Michael J. Meurer, Jean-Francois Richard
Duke University

Apr 30 1990

Although, Federal and Defense Acquisition Regulations permit "no-awards", the federal government very rarely employs an optimal reserve pricing policy when procuring commodities by sealed bid auction. It is an obvious implication from the auction literature that an optimal reserve policy would increase expected surplus four the government. In this paper we demonstrate two other consequences associated with the use of optimal reserve. First, if the procurement official must select a minimum technology level for the items to be procured then, under fairly reasonable conditions, the use an optimal reserve will result in an increase in the technology level of the procured items. Second, when a procurement official suffers from a particular form of agency problem which we revert to as a "technology bias" we demonstrate that preventing him from using an optimal reserve policy may result in greater expected surplus for taxpayers. Intuitively, if the procurement official is more concerned with technology than with cost then the reserve policy exacerbates the bias toward high technology items that are not surplus maximizing (compared to their low technology counterparts). Consequently, acquisition regulations that inhibit the sue of an "optimal" reserve are, under certain circumstances, socially beneficial. However, if the government can effectively monitor procurement officials in order to dampen or eliminate the agency problem then an optimal reserve policy will be beneficial to both taxpayers (higher expected surplus) and to procurement officials (via procurement of higher technology levels).

Manuscript: 

PDF icon 1990-04.pdf