A Case for Budget Auctions in Procurement

In auctions, typically a fixed quantity is traded, while the price and the total monetary value of the transaction depend on the actions of the bidders. We consider a budget auction alternative, where the total monetary value of the transaction is fixed, while the traded quantity is endogenously determined. For a simple SIPV model of a procurement auction with bidders who exhibit constant relative risk aversion, we show that in comparison to the standard fixed-quantity auction the budget auction results in lower (expected) spending when buying the same (expected) number of units. Surprisingly, if the bidders are risk neutral this advantage for the auctioneer does not necessarily come at the expense of bidders