The Impact of Subsidies in Asymmetric Procurement Auctions: A Comparison of Theoretical and Experimental Results

The existence of discriminatory auctions where one class of bidders is offered preferential treatment over another class is controversial. Consider the Affirmative Action policies of the FCC and the Buy-American Act policies of the US Government. The political reasons for such policies are obvious. However, research has shown that there is an economic benefit for such policies in the sense that procurement costs to a buyer may actually decrease as incentives are offered to weaker sellers. In this paper, we test the predictions of Rothkopf et al. (2003) where cost weaker sellers are offered a subsidy in the form of additional payment. For various levels of cost disadvantage, Rothkopf et al (2003), present the optimal subsidy level, bidders' strategies, bidder profitability, and buyer procurement costs. We test these predictions in a series of controlled experiments. This paper is the first to experimentally test these predictions. Due to the wide use of subsidies not only to support social aims but also their potential to reduce the buyer's costs, our findings have both financial and societal implications. (C) 2019, IFAC (International Federation of Automatic Control) Hosting by Elsevier Ltd. All rights reserved.