When (and how) to favor incumbents in optimal dynamic procurement auctions

We consider the problem faced by a benevolent government agency that procures in each of T > 1 periods an indivisible good from one of N > 1 firms. The procurement process is complicated by the superior information possessed by firms about their time-varying production costs and efficiency enhancing efforts. We fullycharacterize the optimal dynamic procurement. To reduce firms' informational rents, the government introduces distortions along two dimensions: when selecting from which firm to procure the good and when providing incentives toward efforts in cost reduction. Both distortions interact in a non-trivial way. Firms that draw lower cost parameters in the first period are favored in the selection process in all later periods, which allows for the provision-of more powerful incentives. (C) 2015 Published by Elsevier B.V.