Procurement Design with Loss Averse Bidders

We show that it is beneficial for a buyer to conduct a multi-stage mechanism if bidders are loss averse. In a first step, we derive a revenue equivalence principle. Fixing the multi-stage structure, the revenue is independent of the chosen payment rule. Secondly, we introduce a simple two-stage mechanism which always leads to a decrease in procurement costs compared to any single-stage auction. Finally we derive the optimal efficient two-stage mechanism.

Fugger, Nicolas, Philippe Gillen and Tobias Riehm (2019), Procurement Design with Loss Averse Bidders, ZEW Discussion Paper No. 19-060, Mannheim.