Affirmative Action through Endogenous Set-Asides

The most recent unpublished version is here: SetAsides (February 2020).

We study the effects of affirmative action through endogenous set-asides. We propose a share auction for dual sourcing in which more intensive affirmative action strengthens the favoured provider. This has the potential to level the playing field and induce more competitive procurement overall. Our main result provides a condition under which affirmative action not only guarantees very substantial minority representation, but also reduces the buyer’s provision cost compared to a first-price auction. We also show that our main result is robust to variations of our benchmark model, including the assumptions specifying what providers know about each other, and how affirmative action programs are implemented.