Dual Sourcing under Risky Public Procurement

Overview & Synopsis

This paper examines the provision of a public service subject to a risk of disruption. To hedge against this risk, a public authority may use a dual sourcing policy. Instead of awarding the production to one supplier, it may split it between two suppliers. If the primary supplier is disrupted, the production may still be provided by the secondary supplier. However, dual sourcing increases the procurement cost, since the secondary supplier might be more expensive than the primary one. The public authority thus faces a trade-off when deciding upon its procurement policy. This trade-off is analysed under asymmetry of information on the secondary supplier's cost. We therefore determine the choice of the appropriate set of suppliers and the quantity to be produced by each selected supplier. We then extend our model by allowing the primary supplier to exert an effort to reduce its probability of disruption. Finally, our model is extended to consider the influence of lobbying on the public authority's choice of procurement policy.