Events

Prof. Alessandro Pavan

The paper studies the design of procurement contracts in environments where the buyer faces uncertainty over the product’s demand and the supplier’s cost. The buyer has a belief but does not fully trust it. They first identify all worst-case optimal mechanisms, which deliver the largest payoff guarantee over a set of plausible demand and cost functions. They then select the mechanism that maximizes their expected payoff (under their beliefs) over such a restricted set. We show that robustness calls for an increase in the output asked of the least efficient suppliers and a reduction of the one asked of suppliers with an intermediate cost. The analysis also identifies conditions under which price regulation is superior to quantity regulation and delivers a few policy recommendations.