Author / Speaker : Laurent Lamy (Ecole Nationale des Ponts et Chaussées and Paris School of Economics)

Paper : On the benefits of set-asides

Laurent Lamy is research fellow at Ecole Nationale des Ponts et Chaussées and  associate researcher at Paris School of Economics. His publications as weel as more details about his CV and research activity are available at: https://sites.google.com/site/laurentlamy78/

Abstract : Set-asides programs is a popular tool in government procurements which consists in forbidding the access to the auction for some well chosen bidders. When entry is exogenous, set-asides can only be detrimental to the seller in private value second-price auctions. When entry is endogenous insofar as some potential entrants may participate to the auction in addition to a given set of incumbents, the picture is mixed because set-asides can also have a pro-competitive effect by inducing a more desirable entry profile. In line with this, we construct a situation in which it is beneficial to exclude stronger potential entrants in order to induce a better participation incentive on the part of weaker potential entrants. Our main general observation is that when there is a single incumbent (or if all the incumbents collude), the set-aside program that consists in excluding the incumbent while allowing all types of potential entrants to participate enhances revenues (and it is the best set-aside policy) if the auction rule is that of the second-price auction with the reserve price set at the seller’s reservation value. By contrast, when several incumbents compete, then it is always detrimental to exclude a small incumbent.