Managing Procurement Auction Failure: Bid Requirements or Reserve Prices

Abstract

This paper examines bid requirements, where the government may cancel a procurement contract unless two or more bids are received. Using a first-price auction model with endogenous entry, we compare the bid requirement and reserve price mechanisms in terms of auction failure and procurement costs. We find that, in comparison with bid requirements, reserve prices can reduce procurement costs and substantially lower failure probabilities, especially when entry costs are high or signals are sufficiently informative. Bid requirements are more likely to result in zero entry, while reserve prices can sustain positive entry under broader conditions.